Goverment Contributions Have Little Impact on Savings

By A. Velasco

A new report that has analysed the way Child Trust Fund accounts have been growing has revealed that government vouchers to give a head start to low income families have done little to affect overall savings.

Predictably, households with higher incomes were found to be more likely to make contributions.

However, with the incentive of tax-free savings offered by both the Child Trust Fund and its replacement, the Junior ISA, families of all incomes should be looking towards children’s savings as a bargain rather than a burden.

Savings habits matter

The data, published by the Social Market Foundation, found that Child Trust Fund accounts opened with £500 vouchers given to lower-earning households were worth an average of £637 in 2009. In comparison, those opened with a £250 voucher were worth more, at £673.

This data suggests that the savings habits prevalent in higher-income homes matter more than the size of the initial contribution.

For lower-income families, this does not mean that savings is out of reach. Small, regular contributions can still make a marked impact on the health of your savings assets. The key, experts say, is developing the discipline to contribute what you can even under a squeezed budget.

The advancement of new children’s savings products, such as the Young Savers Plan, means that families have more flexible ways of saving. This plan offers the ability to save anywhere from £7.50 to £100 per month to ensure that all families can benefit from its tax-effective structure.

Support structure

In addition, the report showed that family and friends made important contributions to children’s savings accounts, averaging nearly £300 a year in 22% of accounts studied.

This means that while the government had to scrap the contribution initiatives of the Child Trust Fund in favour of the Junior ISA, the system is working to get families and their support structures saving for their children’s futures. The findings also illustrate that starting an account that enables the friends, aunts and uncles, and grandparents of a child to contribute is very important.

One such account is the Child Tax Exempt Savings Plan, which can be held in addition to a Junior ISA or Child Trust Fund, and is available from friendly societies.

Having multiple ways to save tax-free means that you are not only ensuring a better future for your child, but taking advantage of your tax allowance and getting the most from your earnings.

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