Sam Dunn: It's a crying shame not to nurture these funds

A great social experiment will begin in less than two weeks as the child trust fund goes live.

A great social experiment will begin in less than two weeks as the child trust fund goes live.

Some 1.6 million vouchers for £250 each (or £500 for poor families) are being issued for investment on behalf of all children born on or after 1 September 2002. The money is locked away until they reach the ripe old age of 18.

This truly innovative government scheme will, it is hoped, give rise to a generation of financially savvy youngsters, growing up beside their own state-sponsored pot of savings.

As the interest earned is tax free, the potential rewards are considerable - if parents make the maximum contributions permitted. A £250 acorn invested in a fund with exposure to the stock markets could, with the full £1,200 a year parental top-up, grow into a magnificent £38,000 oak tree, according to estimates from the financial services industry.

But if the £250 is simply planted in a cash deposit fund and left unnurtured, the fear is that a generation of 18-year-olds will end up with little more than the financial equivalent of a sickly sapling.

Despite cash injections from the Government when children reach the age of seven and - subject to consultation - at age 11, the final value of such a fund could be barely £700.

The danger is that - far from giving children from both better-off and poorer families a good start in life - the funds could create a new generation of haves and have-nots. It's an ugly scenario but one can imagine school leavers in years to come asking each other: "So, how much did your child trust fund make, then?"

The run-up to the launch of the child trust fund on 6 April has been characterised by industry scepticism, consumer ignorance and general indifference. Countless surveys have warned that too many parents know little or nothing about the scheme. This is a terrible shame, given that it is clearly in their children's best interests to invest this free money wisely.

When deciding where to put their child's vouchers, parents have three choices: a simple cash-deposit savings account; a "stakeholder" equity fund with low annual charges (capped at 1.5 per cent) and switching to less risky investments after the child's 13th birthday; and an unfettered shares fund with higher costs but greater exposure to stock markets.

Given the potential rewards offered by the stock market over 18 years - which should be long enough to smooth out the peaks and troughs of the UK's economic cycles - it had been hoped that parents would tick the equity box. But this doesn't look likely: less than one in 10 surveyed said they would choose either of the two share-based accounts, according to the Association of Investment Trust Companies.

And those who do plump for a stakeholder child trust fund face what have been condemned as unfair management charges. For example, the Nationwide stakeholder child trust fund, tracking the FTSE-AllShare index, carries a 1.5 per cent annual charge. Its regular index tracker, on offer to all customers, does exactly the same job but levies an annual fee of only 1 per cent.

This discrepancy - also found at other lenders, including Halifax - is blamed on the administration costs of managing tiny sums of money from each family over 18 years. But how can a product designed to make savings grow cheaply end up being more expensive than standard investment products?

Such aberrations won't encourage parents to invest their children's vouchers in equities. So it seems that most child trust fund money will end up in cash savings accounts. Sure, the rates of interest paid by many of these aren't bad - typically ranging between 4 and 6 per cent. Parents can get the best rates by taking advantage of special introductory offers for child trust funds. And any extra money they can afford to invest will boost returns.

But many argue that investing the money in this way is likely turn out a poor second-best option to putting it in a stakeholder or share-based account.

Surprisingly, help could be at hand from the Inland Revenue. If families do nothing for 12 months, the vouchers will expire and the Inland Revenue will pick a stakeholder equity fund at random for their children's money. Never has the concept of a lottery looked so good.

s.dunn@independent.co.uk