MPs call for 'baby bonds' for all

PLANS for Child Trust Funds should be extended to babies born before last year's 1 September cut-off, MPs have said.

A Treasury select committee recommended that such children should be allowed the tax benefits of CTF accounts, which enable family and friends to invest up to £1,200 a year, although it backed away from calling for the £250-500 payments new babies will receive.

The Treasury has said every baby born since 1 September 2002 will receive £250, with £500 for the poorest children. A further, undisclosed top-up will arrive on a child's seventh birthday. Families can top up the pot tax-free with up to £1,200 a year and the money is invested where parents' choose. The child receives a final sum at 18.

Chancellor Gordon Brown has previously said the scheme was an attempt to give a fairer start to all.

But MPs heard evidence that the funds would benefit richer children more than those from poorer backgrounds.

Treasury figures estimate that children who have £500 invested for them at birth, but whose parents make no additional contributions, will have a fund worth £911 at 18, based on the fact the fund will grow at 5.5% a year in real terms. Meanwhile those who have only £250 invested by the Government, but whose parents make monthly contributions, tax-free, of £40, will have £14,399.

The Government says the cost of offering the tax break will be just £10m a year and it points out that most people do not even use the existing rules that allow them to save up to some £4,200 a year on behalf of their children

Concerns were raised that financial services companies might be put off from providing specialist 'baby bond' products if charges were capped at 1%. MPs said any level of capping is still to be decided.

The committee also welcomed plans to give financial advice. 'We endorse the proposal to set out a hierarchy of savings objectives that promotes firstly paying off debt and secondly saving for a rainy day, ahead of any additional contributions to the child trust fund. This information and advice needs to be clear and unambiguous,' it said.

Ruth Kelly, Treasury financial secretary, said: 'This is a constructive and supportive report, demonstrating the growing consensus that the child trust fund is a reform which is progressive and universal, benefiting every child, with more to those who need help most.'

The funds will be debated in the House of Commons this afternoon.