CTFs key to bridge inter-generational savings gap-experts

Child Trust Funds (CTFs) could solve Britain's debt problem if linked with inheritance tax (IHT) as a part of a wider, inter-generational asset strategy, experts say.

Analysts predict the state-subsidised savings vehicle, set up in April 2005 to ensure UK young adults start life with a capital asset, could be axed in the next round of spending cuts as the Government looks to curb its massive public debt.

But economic and policy experts have defended the initiative, saying in time it will lower personal debt, improve financial literacy, and reduce the risk of future financial crises. It could even achieve more and cost less than the Government's £1bn tax-relief on ISAs, they say.

London School of Economics (LSE) professor of social policy Julian Le Grand told the Defending the Child Trust Fund conference in Westminster: "The ownership of capital gives people psychological and economic independence, and encourages them to invest, to save and to think about the future more widely."

The Chancellor's Budget freeze of the IHT threshold at £325,000 for four years and any future rise in estate tax could be made more palatable if linked to increasing children's funds and a better mechanism for managing inter-generational wealth, said the former No. 10 adviser.

"CTFs could become a financial planning and wealth creation tool by linking them to IHT, and bridging the gap between the older and younger generations," say Le Grand and co-director of think tank the Institute for Public Policy Research (IPPR) Carey Oppenheim.

Last Wednesday's Budget freeze of the IHT threshold has been described by some analysts as "an assault on the middle classes".

At the time, director and co-founder of Seven Investment Management (7IM) Justin Urquhart Stewart said the decision heralded the age of "family financial planning".

"The UK has yet to resolve the issue of how people manage money across generations. In future, families will have to bind themselves together to improve costs and manage risk."

CTFs are currently available to children born on or after 1 September 2002, who receive up to a £500 voucher for a long-term savings and investment account, plus up to another £500 at age 11, which they can access at 18.

Take up of the national scheme is about 75%, says The Children's Mutual Fund, with a third of families adding £19 a month to the Government's initial contribution.

However, some analysts are predicting a lack of public awareness of the scheme coupled with concerns over how 18 year-olds may spend their CTFs, could make the funds an easy target for cuts.