Trust fund gives each child £250 to begin saving plan

All couples and single parents who have had a baby since last September will be given at least £250 from the Government to be put into a savings programme for their child, which it will be able to cash in when it is 18.

All couples and single parents who have had a baby since last September will be given at least £250 from the Government to be put into a savings programme for their child, which it will be able to cash in when it is 18.

Parents, who will not be able to use the money for other purposes, will be able to make their own contributions of up to £1,000 a year into the account, known as a child trust fund, to help young adults with costs such as buying their first house or paying university tuition fees.

Gordon Brown said parents on the lowest incomes would be given the biggest helping hand from the Treasury. One third of the 700,000 babies born every year will receive an initial payment of £500. "Everyone will benefit but more will go to those who need the most additional help," the Chancellor said.

The Treasury will give out more details of how the trust funds will work this summer, although they are not expected to be up and running until 2005.

As well as making the initial payments, the Government is probably going to make further contributions when the children reach the ages of five, 11 and 16. These are expected to be from £50 to £100, depending on the income of the parents.

As well as allowing the money from the public purse to accrue over the child's life until reaching 18, the move is an attempt by the Government to persuade parents and grandparents to build up savings for children. It is expected that the £1,000 annual contributions which relations and family friends can make into child trust funds will be tax free or lightly taxed. Parents are likely to have some say over how the money is invested.

The scheme will be an improvement on the current situation whereby money given by parents to children is taxed at the parent's income tax rate.

Mr Brown, one of the Government's most ardent campaigners against child poverty, said: "At the age of 18, on the basis of historic rates of return, this will enable more young people to have more assets that were once available to only some."

However, sceptics doubt that the trust funds would have much impact on anyone other than those who can afford to contribute close to the full £1,000 a year. Simon Davis, a senior consultant at BDO Stoy Hayward Wealth Management, pointed out that the minimum £250 put in the bank might only be worth £299 in today's money in 18 years based on current inflation and interest rates. "Is this another damp squib? It could be like stakeholder pensions, which have seen a very low take-up," Mr Davis said.

Stakeholder pensions, which were launched in 2001, were also aimed primarily at low earners. In fact, richer individuals have been the product's greatest fans, since they are a tax-efficient way to save on behalf of non-earning spouses and children.

There is also concern that families contributing very little to their child's trust fund will have no choice about the type of savings vehicle, probably having to opt for a low-cost savings account paying a relatively small rate of interest.

By comparison, a unit trust or any similar product that could be invested in the stock market would probably yield more in the long term but would also require parents to invest a sum well over the Government's contribution to make it cost-effective for the unit trust company to manage the money.

Patricia Mock, director of Deloitte & Touche Private Clients, said: "If you take £250 and assume it grows by 4 per cent a year – unlikely in today's climate – by the age of 18, that is £506. It is difficult to see how any unit trust company could deal with this because they could not make any profit."

Some industry players were more positive. David White, chief executive of Children's Mutual, said: "We know in many cases people who couldn't afford to save for themselves want to save for their children to help them as much as possible. This will give them a good head start."

Case study

The mother-to-be

Caroline Sutton

Writer and producer

Home: Brighton. Lives with her partner, Ian Hallworth, a web designer, and is eight months pregnant. Will be entitled to the baby savings scheme.

Ages: Caroline 37, Ian 33.

Income: £30,000 to £35,000 each.

Savings: None.

Company benefits: None.

Outgoings: Mortgage £150,000.

Politics: Has traditionally voted Labour and believes in a policy of taxation for a stronger welfare state.

Hopes from Budget: No specific needs but wanted to see dedicated spending on public services, especially transport and the health service.

Actual effect of Budget: The couple face paying an extra £416 in yearly income due to the rise in national insurance but will benefit from the child trust fund in which the Government will invest £250 for the unborn baby.

Reaction: Ms Sutton described the baby trust fundas "a fantastic way of starting a family off on the right track". She said she did not begrudge paying extra national insurance because both she and her partner felt a commitment to "pay taxes so they could benefit the less well-off people in society".