After 15 years, a $12-billion piggy bank is finally ready to be raided.
British teens turning 18 on Tuesday will begin receiving payouts from an experimental savings programme enacted when Tony Blair was prime minister and Harry Potter and the Goblet of Fire was the world’s No. 1 movie.
Called Child Trust Funds, the accounts were set up by the state with initial grants ranging from £250 for children in well-off families to £500 pounds for those in low-income households. They provide every person born in the UK between September1, 2002, and January 1, 2011, with a tax-free windfall to start their adult lives.
The 18-year-olds will have access to account balances that range from about £1,000 ($1,330) to £70,000 each, depending on how they were managed, according to estimates by Moore Kingston Smith, a London-based accounting firm.
Could set a trend
With around 55,000 people redeeming their Child Trust Funds every month until 2029, the programme is poised to affect the financial lives of a generation of young Britons. Officials in other countries are eyeing similar initiatives, as the economic turmoil sparked by the coronavirus crisis prompts a fresh look at universal basic income and other forms of direct-cash payments as social welfare. Last week, New Jersey Governor PhilMurphy proposed granting children born in the state a $1,000 state-funded nest egg.
The cash is a welcome dose of good news in an otherwise terrible year for British teens. Many high-school aged students in the UK have had to cope with cancelled school terms and anxiety about their future, after a government plan to set final grades for graduates went haywire in the pandemic.
While 529 accounts in the US earmark funds for college, Child Trust Fund holders can spend their money however they like.
“It’s quite exciting, isn’t it?’ says Sasha Brealey, a London high school student who will turn 18 on September 19. “I’ll keep it in my savings account to help pay for university and keep it as cash. I don’t know enough about the stock market, so I would probably do something quite stupid if I invested it.”
If left alone, a Child Trust Fund will automatically morph into an individual savings account, which is tax-free and currently yields a 3.5 per cent return, according to Hargreaves Lansdown. Sarah Coles, a personal finance analyst with the London-based investment firm, says the vast majority of younger savers tend to maintain such accounts well after they mature. Still, she urges parents to chat with their teens about their savings long before it’s time to make such a decision.
“If young people understand how it’s invested, it will give them a good idea of the long-term growth potential,” Coles says. “It can help build a sense that their money has been working hard for them, so they need to treat it with respect.”
Addressing inequality
Launched in 2005, the Child Trust Fund programme grew out of an effort to provide young people with a material stake in society and address inequality. Many conservatives argued the baby bonds initiative amounted to a universal state handout that would be a waste of money. Leftists disliked the role played by the securities markets in the programme and favored cash benefits.