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Response to the Government's consultation on payments at age 7 to the Child Trust Fund
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April 2005 One Parent Families welcomes the opportunity to respond to this consultation on the value of the top up payments the Government will make to the Child Trust Fund when children reach the age of seven. We welcomed the introduction of the Child Trust Fund as a means of providing all children with an asset at age eighteen. 52% of children in one parent families are still living in poverty, and Government action is particularly necessary to equalise life chances for this group. We hope that the further contributions provided by the Government at age seven can be as progressive as possible in order to ensure that the Child Trust Fund addresses rather than perpetuates inequalities.
One Parent Families and Savings
52% of children and 51% of individuals living in one parent families are still poor. This restricts their current ability to save and may also restrict their ability to make contributions to the Child Trust Fund. The Families and Children Study for 2002 found that while 47% of couple families with children were saving regularly, only 22% of one parent families were doing so, and 55% of one parent families had no savings. Income was an important factor in determining savings behaviour, with only 18% of the poorest one fifth of families saving compared to 67% of the richest one fifth.[1]
The Government hopes that the Child Trust Fund will ‘encourage parents and children to develop the savings habit’[2] but research suggests that when people are not saving it is often because they cannot afford to. One study found that two thirds of lone parents said that they could not afford savings of £10 a month[3], and research looking at reasons for saving found that people’s view of their own financial situation was by far the most influential factor in explaining savings behaviour.[4]
Lone parents and their children, particularly those on low incomes, therefore have low levels of saving, and this seems to be predominantly because they cannot afford to save regularly. This suggests that Government contributions to the Child Trust Fund may be particularly important for this group in determining the fund’s eventual value.
Value of the contribution at age seven and ratio between the standard payment and that for those on the lowest incomes
The lower levels of savings held by those on low incomes suggests that there is a danger that the Child Trust Fund could perpetuate inequalities between rich and poor children rather than, as was intended, to help address them. If better off families make higher contributions to their child’s trust fund, as seems likely, the value at age 18 of the funds is likely to diverge significantly. The Government has recognised this with a higher contribution for poor children when the fund is opened, and the promise that payments at age seven will also be progressive.
However, there is evidence that the current ratio of progressivity may not be sufficient to redress the differences caused by those in higher income families making higher contributions to their child’s fund. Research by the Institute for Public Policy Research (ippr) has shown that, for example, if contributions are made to rich and poor children of £250 and £500 at birth, and of £100 and £250 at age seven, higher savings by the family of the rich child still leave them significantly better off. If the family of the rich child save £250 a year, they end up with a fund of around £7000, compared to a fund for the poor child whose family have saved £50 a year of around £2,500.[5]
We therefore feel that the ratio of progressivity may need to be steeper than the current ration of 1:2 between the amounts given to the poorest children and those given to others. Ratios in other forms of family support are already more progressive. For example the difference between the maximum child tax credit (for one child) and that given to those receiving the family element only is around 4:1 (£2170 compared to £545). We would suggest that a similar ratio could be applied to the contributions to the Child Trust Fund at age seven, with the standard payment remaining at £250. This may however be expensive, and the Government may wish to look at alternative ways of encouraging saving, as set out below.
Other means of encouraging saving
Even with a high degree of progressivity, other means may be needed to boost the value of the funds for children from low income families. Matched saving schemes have been trialled successfully through the Saving Gateway, and may have the potential to encourage parents to make contributions to the Child Trust Fund. Lone parents made up 31 per cent of all participants in the Saving Gateway pilots and saved a median amount of £17 a month, and the interim evaluation of the pilots suggests they were successful in encouraging those not previously saving to do so.[6]
The introduction of matched savings into the Child Trust Fund, perhaps on a similar 1:1 basis for those entitled to maximum Child Tax Credit, therefore looks to have similar potential for encouraging saving – one of the main aims of the introduction of the Child Trust Fund. It would also help to significantly boost the value of the funds for children from low income families.
However, the most effective way of encouraging saving may be to boost the incomes of the poorest families in other ways. The research suggests that income is the most important factor in determining whether people feel able to make savings or not, and those who remain dependant on state benefits at their current levels remain unlikely to be able to make significant contributions. Increases in benefits and tax credit rates, measures to help more lone parents into work, and to make work pay, and an increase in the affordability of childcare, would all go some way to improving the ability of parents to provide for their children’s futures. While the Child Trust Fund should be seen as part of the broad strategy to tackle child poverty, its success will depend to a large extent on other measures within that strategy.
[1] Barnes M et al (2004) Families and Children in Britain: Findings from the 2002 Families and Children Study (FACS) DWP. [2] HMT (2003) Detailed proposals for the Child Trust Fund HMT. [3] Middleton S ‘Coping for the Children: Low income families and financial management’ in ESRC (2002) How people on low incomes manage their finances ESRC. [4] Kempson, E and McKay, S (2003) Savings and Life Events DWP. [6] Kempson E, Collard C and McKay S (2003) Evaluation of the CFLI and Saving Gateway Pilot Projects: Interim Report on the Saving Gateway Pilot Project Personal Finance Research Centre, University of Bristol.
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