Baby bonds under fire

MPs branded the government's £500 baby bonds a tax break for the wealthy and "deeply flawed" this week.

The bonds, which Chancellor Gordon Brown first announced two years ago, will be given to all children when they are born and will mature when they are 18 years old. They will be distributed in 2005 and backdated to September 1, 2002.

The government hopes parents will choose to invest the cash in the stock market and choose one of the many equity linked products it wants insurers to offer when the bonds, known as child trust funds, are officially launched.

Most families will receive a basic £250 fund, while those on lower incomes (those receiving child tax credit and with a household income below £13,230) will get £500.

MPs on the treasury select committee quizzed civil servants from the Treasury and Inland Revenue and were told that no research had been undertaken to find out if low income families would use the trust funds to save. They also heard how the fund will count against benefits should the child leave school and claim Jobseeker's Allowance. Grandparents could lose some pension benefits if they make gifts to their grandchildren, the Treasury admitted

According to the government's own figures, a £250 payment on its own would have grown to just £456 by age 18.

The £500 gift will be worth £911 after 18 years based on annual growth of 7% gross and an inflation rate of 2.5%.

But if parents contribute £40 a month to the fund it will grow to become a tax free lump sum of £14,000, the officials said.

MPs said this amounted to a tax break avaliable only to wealthier families who could afford to save regularly.