Wrappers Child Trust Funds
There is a germ of a good idea here. But, as always when politics meets the City, the detailed execution has produced an expensive nonsense. We suggest you don't bother.

It works like this
The government gives little Johnny 250. It is invested for him, free of tax. At age 16 he gets control of (but not access to) these savings. At age 18 it is his - he can spend it.

If you like, as a parent you can set up a Child Trust Fund (CTF). The government's 250 goes into this Fund. A further £250 is promised when little Johnny is seven. If you are receiving Child Tax Credit both these grants are doubled.

In addition, you may contribute up to 1,200 per year yourself. The whole lot is subject to the same vesting rules as the 500. All investment returns withi the fund are free of tax.

So, at age 18 little Johnny could get up to 18 times £1,200 +500 = 22,100 + investment returns, with no strings. And we know he will invest it prudently for his pension, don't we?

So I'd better set up a CTF to get the first £250?
Hold on a minute. If you do nothing the government will stick the 250 into a stakeholder for little Johnny, so he won't lose out.

So the question is, do you want to invest up to 1,200 a year into what is effectively an ISA held in trust for your child? Well, you might, except for one thing:

Most CTFs on offer are charging 1.5% per annum for what are effectively trackers (which you should be able to get for 0.3% per annum). So you are giving away 1.2% per annum for the tax breaks. This only begins to make sense if you are, and likely to remain for 18 years, a higher rate taxpayer and you pay capital gains tax (ie you make gains each year in excess of your CGT limit - 9,200 or 18,400 for a couple in 2007/08). Further, you would only do it if you were already making your full ISA investment of £7,200 per person (£14,400 per couple).

If you are in that position you are quite well off. And if you are quite well off why do you want to be fiddling around with a special investment wrapper with a piddling amount going in each year, which could cause you grief in 18 years time?

(Suppose your child has a personal situation which easy money is going to harm? Would you be happy if your 18-year-old spent your money on going to art school when you wanted her to become an accountant - or vice versa? Do you remember what you were like when you were 18?)

And do you think, over an 18 year period, any government is going to be able to resist putting some restrictions on what the final sum is used for? And/or reduce the benefits?

Isn't life complicated enough?



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