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Better but cheaper? Reforming the Child Trust Fund

Prabhakar, Rajiv; Lloyd, James and Mulheirn, Ian (2010). Better but cheaper? Reforming the Child Trust Fund. The Social Market Foundation, London, UK.

URL: http://www.smf.co.uk/files/8413/2317/4814/SMF_chil...
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Abstract

The Child Trust Fund (CTF), tax-incentivised universal children’s savings accounts launched in 2002, was arguably the most innovative social policy implemented under the post-1997 Labour governments. The objectives of the CTF range widely across savings policy, financial engagement and asset-based welfare, and are notable for seeking to change the behaviour of both children and their parents. However, the CTF today is at a crossroads: it is not achieving its aims as well as was hoped, and it is no longer affordable in its current state.

Administrative data that has emerged since its launch has revealed wide variations in savings rates for different children within the CTF, and in active account openings by parents – a key objective of the policy. Crucially, these variations appear correlated with socio-economic characteristics, suggesting that the core target groups for the CTF are not engaging with the policy. Savings rates and active engagement need to be significantly improved among lower-income households if the policy is to meet its objectives. But the deep-rooted savings and financial engagement problems that the CTF was introduced to address will remain unless policy addresses them and a reformed CTF remains the best vehicle to do so.

At the same time, the UK confronts an acute public spending squeeze starting this year to begin the long process of fiscal consolidation. Confronted with a dire fiscal situation, the Coalition Government elected in 2010 has announced its intention to pass legislation to end CTF payments, saving £320million in 2010–11, rising to £520million in 2011–12. From August 2010, contributions at birth will be reduced and contributions at age 7 will stop. From January 2011, all contributions at birth will stop.

This paper therefore outlines a package of reforms to boost the effectiveness of the CTF while also exploring how the cost of the programme could be cut by over two-thirds, or £420 million per year, while retaining many of its benefits.

Item Type: Other
Copyright Holders: 2010 The Social Market Foundation
Project Funding Details:
Funded Project NameProject IDFunding Body
Not SetNot SetESRC
Academic Unit/Department: Social Sciences > Economics
Interdisciplinary Research Centre: Innovation, Knowledge & Development research centre (IKD)
Item ID: 31371
Depositing User: Rajiv Prabhakar
Date Deposited: 01 Feb 2012 13:12
Last Modified: 23 Oct 2012 14:28
URI: http://oro.open.ac.uk/id/eprint/31371
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