Baby bond plans unveiled

FULL details of plans to give money to every baby in Britain were today unveiled, including a top-up payment when children reach seven years old.

The Government confirmed plans first announced in 2001 by Chancellor Gordon Brown, who himself became a father earlier this month, for the Child Trust Fund, or 'baby bond'.

Under the scheme, each child born on or after 1 September 2002 will receive an initial endowment of £250, rising to £500 for the poorest children. Families with a household income below the Child Tax Credit threshold (currently £13,230) will receive the additional £250. The extra should benefit a third of households.

Babies will be automatically allocated the money through the child benefit system in the form of vouchers from April 2005. The Inland Revenue has said that babies born between the start of the scheme and 2005 may receive higher payments to reflect the delay in being able to invest the money.

The Government will make a further payment when children reach seven, although it has not said how much this will be. Family and friends will be able to contribute up to £1,200 a year between them to the fund.

Investment rules will be along the same lines as existing the guidelines for Isas – any income earned or any rise in value will be free of tax and parents can choose a provider. These providers will be required to offer stakeholder accounts with low charges. They will also be required to manage the risks by switching the money between diferrent types of investment.

David White, chief executive of The Children's Mutual, believes trusts will be most likely to move away from shares, which are considered risky, once a child turns 13, and steadily invest more of the money in gilts in order to lock in any gains. The Government will only lay out guidelines for balancing risks rather than ordering providers exactly how to invest.

The final pot can be collected at 18, with no restrictions on how it is spent. The Inland Revenue will deal with accounts for children in care.

Source: Inland Revenue (Based on annual investment growth of 7% and inflation of 2.5%, hence making the estimates real terms), and This Is Money calculators

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HBOS, which owns Halifax and Bank of Scotland, today welcomed the scheme. It estimates 600,000 children a year will benefit and that after 10 years the market will be worth £12bn. 'The Child Trust Fund is a much-needed boost to encourage the savings habit in our children and a fantastic legacy for future generations,' said Nick Robinson, head of savings.

HBOS estimates that adding £15 a month to the initial £250 endowment would add up to £5,000 in real terms once a child reaches 18.

Financial Secretary Ruth Kelly said: 'The Child Trust Fund will ensure that children will have assets of their own to help them get a better start to their adult life. It will also give young people experience of savings and investment opportunities and help them to manage their finances better in later life.'

A YouGov poll, commissioned by the Association of British Insurers, a group that represents investment companies, found that 82% of parents would contribute to their child's fund. This included 75% of those parents who do not currently save for their children.

The poll showed that 6% would pay in the maximum amount allowed, 55% would pay in regular amounts each month and 21% would contribute occasionally or annually. 'The Child Trust Fund is a new and imaginative way of helping children as well as their parents to get into the habit of saving,' said director general Mary Francis.