Parents choose how to invest child trust cash

Parents will be free to choose from the available schemes for investing the tax-free cash - up to £1,000 - the government plans to give through the child trust fund scheme, Downing Street and the Treasury said yesterday.

The much-discussed example of asset-based welfare will be available from April 2005 to all children born after September 1 last year. The government regards the scheme as a way of engineering a savings culture and giving the poor a responsible stake in society.

Yesterday's Treasury paper, the third consultation document on the subject in three years, is the most specific yet and heralds legislation in the coming parliamentary session. Ministers regard asset-based welfare as one of the big ideas for a third term.

The basic £250 endowment will be supplemented by an additional £250 for children of families on child tax credit, provided the household income is below the level, currently £13,200, at which the CTC tapers off. Roughly one-third of Britain's children will receive this additional cash.

A further, as yet undisclosed, payment which could amount to several hundred pounds will be made when the child reaches the age of seven. Poorer families will get more.

The shadow welfare secretary, David Willetts, claimed the proposals were an extension of means testing, and the Liberal Democrats said the document was "painfully thin on detail".

Parents, families, friends and the children themselves will be able to contribute up to £1,200 a year between them, amounting to more than £22,000 by the time the child reaches 18. No cash will be accessible until the age of 18.

A range of financial companies, from banks to fund management firms, will offer a variety of cash accounts and unit trusts.

Some observers were surprised at how candid the government was being in its enthusiasm for share-based investment as opposed to low-risk savings accounts.

"The government wants all families to benefit from the potential higher returns that might be achieved through equity investments (shares in companies), although appreciating that with any investment in equities there is a risk of a loss in value," the document says.

The Inland Revenue will issue a stakeholder fund if a parent fails to open an account after the child's birth. Funds will also be available to children in care.

Yesterday the government predicted that by 18 a £250 payment on its own would have grown to just £456. If parents were able to contribute £10 a month the figure would be £2,198. If they could afford £40 a month the child could expect a £14,399 nest egg at 18.

Some commentators said the estimates were optimistic, because they did not take into account the charges companies would levy, which would eat into the figures. "Nobody will be able to get that," one investment company said.

Some were disappointed at the lack of detail, especially a decision on the level of the charge. The document said there would be an announcement on this "later this year".

Ministers want a maximum charge of 1% a year but many investment companies say it needs to be more like 1.5% or 2% to be profitable for them.

Tony Herbert, a policy adviser at the Association of British Insurers, said many companies "would struggle to cover their costs with 1%".

One company, Virgin Money, said the government had broadly got things right but the charges issue remained one of the "big stumbling blocks".

Main points

· Child trust funds - "baby bonds" - will benefit every baby born on or after September 1 2002

· Eligible children will receive a cash handout at birth - £250 for most but £500 for those from poorest families

· Government will top up fund when child turns 17

· Relatives and friends can add up to £1,200 a year

· Money will be invested in accounts offered by wide range of financial companies

· Children will not be able to access money until account matures when they turn 18

· There is nothing in the proposals for children born before September 1 2002