The government has asked providers whether child trust funds should be subject to ‘lifestyling’ into less risky assets as they approach maturity.
A consultation paper published by HM Revenue and Customs - which closes by 14 December - is aiming to gather views and evidence about the costs and benefits of lifestyling for account holders and providers.
Views are also being sought on the potential consequences of removing the requirement that stakeholder child trust funds should be subject to lifestyling.
Child trust funds were established in 2004 as a way of encouraging saving for children, with most children living in the UK and born between 1 September 2002 and 2 January 2011 holding a CTF, containing funds contributed by government.
As at April 2012, more than six million children held a CTF account, around three quarters of which are stakeholder accounts - stocks and shares accounts containing ‘stakeholder’ features and protections set out in legislation.
These are already subject to lifestyling requirements - a process designed to manage risk and volatility in account investments as the account holder reaches age 15.
This means that CTF providers should start lifestyling some 327,000 of their accounts by 2017 to 2018 at the latest.
Current legislation does not set out prescriptive requirements on how account providers should implement lifestyling, with the government stating that many providers are considering how to carry out the process.
Since the establishment of lifestyling requirements for stakeholder CTFs, new eligibility ended in 2011, meaning that no new accounts are expected to be opened in the future.
The Junior Isa was introduced instead and parents now have the choice of transferring savings to this account.
“In the light of some of these developments, a number of account providers have expressed concerns about future uncertainties and challenges within the CTF market,” read the consultation.
“It has been argued that measures to reduce the costs of offering CTF accounts should be considered, to help ensure that this account remains attractive to a broad range of financial institutions.”
However, lifestyling could involve costs for providers, in adopting new systems and processes or through having to make changes to investment strategies.
“The government believes that such costs will be justified if lifestyling delivers appropriate benefits and necessary safeguards for CTF holders.”
One of the reasons for establishing lifestyling was the presumption that, on maturity, young adults will want to close their account or move savings to a cash account, supporting longer-term saving.
“It does, however, raise questions about the benefits of lifestyling for a CTF holder who intends to roll their non-cash savings into an Isa when they reach 18,” noted the paper, adding that in such cases, lifestyling could impose unnecessary changes to an investment strategy that might lead to lower returns being achieved, as the proportion of less risky investments held in the account is increased.
The document pointed out that while it is possible to opt-out of lifestyling, it is not clear how many account holders or registered contacts are aware of this option, or how many are likely to take it up.
peter.walker@ft.com
