To the point - A little goes a long way

Nick Pearce, director of the Institute of Public Policy Research
Monday, November 14, 2011

If your child was born after the first of January this year, then you missed the deadline to get a Child Trust Fund.

But do not despair, you are now eligible to open up a 'junior ISA' for your child.

The good news is that you can save up to £3,600 a year, tax-free, for your child to access at the age of 18. In an attempt to attract new business, the two biggest building societies offering junior ISAs are offering better rates than they do on their Child Trust Funds.

But the bad news is that many parents feel they don't have the spare cash to set aside and so won't even open an account. Those of us with children eligible for the Child Trust Fund got a voucher worth £250 to start us off. If we didn't get round to opening an account, the Government did it for us. If the Government hadn't scrapped it, we'd have got another payment of £250 when our child turned seven.

Yet the scrapping of the Child Trust Fund has not led to a single public protest and most parents have just accepted it as a necessary part of the austerity drive. The Government is only saving £500m, which in the context of a £6.2bn spending cut, is pretty small change.

But the evidence shows that a little goes a long way and that there is a significant 'asset effect' in later life. LSE academic Abigail McKnight found that an asset holding at age 23 improves employment and wage prospects at age 33 and age 42.

Child Trust Funds were a bold attempt to ensure all young people could start adult life with a nest egg. But Labour failed to make the Funds popular or to persuade the public that they should be a permanent fixture. Only time will tell whether the new Junior ISAs are going to work, but because the Government will not provide an initial voucher to kick-start the account, many families may not feel they can afford to open one.

Evidence shows that the current tax relief given to higher income earners could be withdrawn without reducing their propensity to save. These funds could be used to increase saving by lowto middle-income families at no extra cost to the Government.

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