CHILDREN S SAVINGS OPTIONS FOR A FUTURE ACCOUNT ISSUES PAPER RESPONSE FROM TISA October 2010
CHILDREN S SAVINGS OPTIONS FOR A FUTURE ACCOUNT ISSUES PAPER TISA is the key Association supporting Children s Savings Schemes. Over 70% of current CTF accounts are provided and/or distributed by our member firms. Additionally, we are the key Association supporting ISAs and other saving schemes. We are pleased to have the opportunity to respond to this Issues Paper and have incorporated a fairly high level of detail in our response below. Our response is based on the feedback from our member firms who have years of experience in the investment and savings industry. Q1: Following the end of CTF eligibility do you think there will be sufficient products on the market to meet parents needs in saving for their children? There is need for a scheme which would be attractive to the consumer; one that is simple, providing choice, flexibility & variety and is built on a brand they can trust. Certainly, outside the CTF, there is nothing on the market for children which meets these objectives We fully support the concept of having a scheme specifically focussed on saving for children. Statistics show that rates of saving by families in accounts for children has increased from 18% to 31% in the short time CTFs have been available. Some providers are seeing up to 50% of CTF accounts receiving top-ups. We would expect this trend to continue with the introduction of a suitable alternative to the CTF although the rate may of course be affected by the withdrawal of the Government endowment. We believe that the fundamental structure of the CTF, which over time has been modified by the government in response to industry feedback, works extremely well, has a high level of awareness amongst parents, and could be used for future savings without government contributions. There is an increasing awareness of the need to take personal responsibility for the future whether it be retirement, higher education or housing. Many parents even now are making financial sacrifices to help children through university or onto the housing ladder so providing a vehicle which the public feels comfortable with is key to helping families make provision for the future. In addition to building a financial reserve for future needs, the other key advantage to a scheme dedicated to children is the focus it provides for financial literacy and financial inclusion. It is an established fact that financial understanding is woefully inadequate across the general public and much work needs to be done in this area. Building an understanding of financial matters while a child is still at school provides building blocks for the future and a universally available scheme provides a focus schools can use for educational activities. These activities will generate discussion within the home thus including the potential for greater financial engagement and understanding by parents.
Q2: In principle, do you think the Government should create a new children s saving account after eligibility to the CTF ends? Yes. Following the rationale in the previous answer, we fully support the provision of a savings account for children. From the perspective of the industry, introducing a completely new scheme requiring new systems, marketing and procedures would mean incurring heavy costs. This would inevitably impact on the number of providers who decided to offer such a scheme particularly where there is no government contribution. It would therefore seem appropriate to piggy back on an existing structure, regulations and infrastructure, to minimise costs and encourage multiple providers thus giving choice and variety to the customer, building on existing confidence and trust. Q3: Aims and key features We support the concept of having the funds locked-in until 18 (or optionally beyond) but would suggest that consideration be given to allowing for early access in the event of disability or terminal illness. To aid progressive educational value, we would also recommend incorporating a point in time at which the child takes control of the management of the funds. This could be at age 16 the current age at which they can open a Cash ISA or take control of a CTF, or even earlier to build on supporting educational activities. One of the attractive features of the CTF which we would recommend be incorporated in a future scheme for children is the concept of enabling all types of investment to be held within the same account i.e. not like the current ISA model which has separate Cash and Stocks & Shares components. Having just the one pot provides a much simpler product and would be easier for families and particularly children to understand. We support the concept of the annual subscriptions being capped. The level of that cap is discussed in Q6. While we recognise that there will be no government contributions or matched payments in the current financial climate, it would seem to us to be appropriate to incorporate the potential for that to happen at a future date. Q4: Who should be eligible for any new account? TISA recommends that all children be eligible for such an account. This would include children who were born before Sept 2002 and therefore not eligible for a CTF as well as children born from Jan 2011. As an association focussing on schemes rather than industry sector, we have found there to be a sharp division between the different types of provider those who currently offer ISAs but not the CTF and some of those who currently offer the CTF. Some of the providers who currently offer the CTF would like to see most features retained, with a scheme which only has a single manager, the subscription year running from birthday to birthday; some would also like to ensure existing CTFs are ring-fenced and not able to transfer in to any new type of account.
ISA providers (and some CTF providers) have a different perspective, favouring allowing multiple managers thus providing broader investment choice and variety and also providing the ability for existing CTFs to be transferred in to any new scheme. We feel that it would be possible to rely on self certification for eligibility. Could it be possible for the National Health Number to be used as an identifier as this is already provided at birth? A National Insurance number could be provided at maturity - although there has been a suggestion that NINos are already generated at birth so could perhaps be notified to the family at birth. We also believe that CTF schemes should remain in place until a new scheme is available. Q5: How should any account be made clear and simple, for example for those with low financial capability? It is essential that the account be kept as simple as possible. For that reason, allowing both cash and stocks and shares to be held within the same account would be a key feature. Using the account as a focus for education will be an important element in future capability and therefore a major reason for such an account to be provided. We do not believe it should be mandatory for a stakeholder account to be provided. Take-up of stakeholder pensions and CAT standard ISAs has proved to be extremely low and evidence within the market place indicates that there are some non-stakeholder accounts which are keenly priced. Q6: What should the annual contribution limit of any new account be? There are already precedents for the annual contribution limit of accounts for young people. The limit for a stakeholder pension which is available for children from birth is 3,600. The limit for a Cash ISA, which is available for children from the age if 16yrs, is 5,100. To provide a degree of consistency within the market, thus working towards clarity and aiding understanding, we would suggest one of these limits is applied to any new account. We recommend that the contribution limit is index linked from outset to match the current ISA arrangements. With regards contributions, we also recommend that any account is able to accept money from third parties, thus allowing contributions from friends and family, charities or other organisations. This wider avenue for contributions provides opportunities particularly for disadvantaged children, children in care etc. who might otherwise not have the opportunity for a pot of savings to be built up. We recommend that the account runs in line with tax years. Not only would this provide consistency across the market in line with ISAs and pensions but it would aid in the use of the scheme for financial education, introducing the concept of tax years at an early age. Using the tax year would also mean the scheme would be incorporated in the ISA marketing season, thus assisting in raising awareness as in Q9 below.
Q7: What should the minimum payment threshold be for any new account? If the Government was minded to set a minimum payment threshold, we suggest that there is a level set for regular monthly payments (say 10 pm) and a different level set for one-off lump sums (say 50), but would prefer this is left to market forces. We do not recommend setting any definitive requirements for payment methods. The landscape is changing rapidly with the demise of cheques in the not too distant future therefore any specific list now will inevitably change. In addition, the processing costs of different payment methods vary and therefore it would be preferable for providers to be free to select payment methods appropriate to the minimum contribution amounts they offer. Q8: What should happen to any new accounts on maturity? In order to maintain maximum benefit for the consumer, we recommend that on maturity, the account automatically rolls over into an ISA. As mentioned before, we recommend that the account matures when the child reaches18, some providers believe there should be an option to extend the account to 21 or 24. Q9: How could the Government and/or other organisations effectively raise awareness of any new account? One of the advantages of building on an existing brand is that extending that model would require less education than a completely new brand. However, continual provision of information would be critical as young people become parents for the first time. Provision of information from the Government at the point of birth through existing channels (e.g. NHS) would be central to that. Extending an existing brand does provide a natural avenue for raising awareness as the ISA season is always heavily promoted across the industry and the additional opportunity to promote an extra account could easily be incorporated. We would also recommend continuation of some of the CTF initiatives with organisations such as the CAB e.g. local workshops. Q10: How might providers encourage friends and family to save for children? It is likely that a number of providers will provide incentives for activity such as account opening, top-ups, minimum investments. The creation of an alternative to the CTF is of course complex, with many details to be determined. TISA would welcome the opportunity to meet with you and your colleagues to discuss options for the future. Tony Vine-Lott Director General TISA