Treasury raises price cap on child trust funds

The government is to backtrack on a proposed 1% cap for the charges providers can levy on child trust fund products, which came under much criticism from potential providers. In draft regulations for the fund, published yesterday, the Treasury announced plans to cap charges on the accounts at 1.5%.

The child trust fund will mean a payment of ?250 for babies born after September 2002. It was believed the Treasury planned to impose a limit on providers, preventing them from charging investors any more than 1% of the money paid into the fund, and banning any other fees, in an effort to keep the cost of saving to a minimum for parents.

However, several potential account providers said that such a cap would render it too expensive for them to justify offering the product.

The Treasury said that the charge cap of 1.5% for the stakeholder child trust fund accounts was "in the best interests of consumers, as it encourages as wide a selection of providers as possible to offer CTF accounts. A large number of providers will encourage competition and ensure the best value for consumers."

Under the draft regulations, parents and anyone else wanting to invest for a child will also be able to contribute with payments of as little as ?10 and above, up to a total limit of ?1,200 per year, at no charge, and there will be no fees for transfers from different accounts.

The move has been broadly welcomed by potential providers of the accounts. Jason Hollands of investment company ISIS said: "The government has clearly listened to reasoned argument on this one and accepted that, for this savings initiative to be a success, which it has to be, it must be commercially viable for product providers."

Peter Hales, a director at Norwich Union Life, which was particularly vocal in criticising the 1% cap, said the 1.5% cap announcement was "an important step in the right direction" and clearly showed the government understood a price cap of 1% was not economically viable.

"In the light of the draft regulations published today, we are actively reviewing the potential of operating in the child trust fund market," said Mr Hales.