In early
February, the Inland Revenue has issued a draft Statutory Instrument detailing
the rules that would apply to CTF’s. It
is this document that is the source of the 1.5% per annum cap stories. I know that some of my clients are interested
in CTF and whether to enter the market and, therefore, I have come up with a
quick resume of the required product structure and some of the terms that will
apply to satisfy the regulations.
The first
thing to note is that the CTF can be almost any type of contract – deposit
account, unit trust holding, OEIC holding and insurance contract. The feeling from the document is that the
latter is expected to be the norm.
If a CTF is
offered, then the provider has to offer a “stakeholder” CTF as an option. It can offer a non-stakeholder product as
well but must make available a stakeholder product and draw attention of the
client to the stakeholder product. Like
ISA’s, CTF providers have to register with the Inland Revenue. Similar reporting is required as for ISA’s.
The generic
CTF will accept the £250 or £500 (if the family is poor) contribution from the
government and the later top up of another £250 or £500. It can also accept contributions from the
family of up to £1200 per annum per child.
A child can only have one CTF but will be able to transfer the CTF
without penalty (other than allowing for movement in the market) from one
provider to another. All CTF’s will be
in the tax exempt fund (similar to ISA’s).
Stakeholder
CTF’s need to be predominantly equity based investments with “lifestyling”
built in. A phased switch from equity to
deposit / short bond is required from age 13 to age 18. The insurance contract must be a property
linked contract by implication with an annual management charge of less than
1.5% per annum (actually less than 1.489% when allowing for compounding of the
daily rate). Monthly or weekly priced
contracts are allowed but all contracts must be able to transfer / encash at last
price (no forward pricing). No bid/offer
spread is allowed – single priced only.
The charge must cover all costs except for direct investment costs
(buying selling spreads and charges on equities) and the stamp duty.
For
stakeholder CTF’s, payment must be allowed by cash, credit card, debit card,
cheque, direct debit, standing order or electronic transfer. The cash collection and credit card handling
will be a nuisance. The latter due to
the fees charged by credit card companies (some 2.5% of the amount paid). The
minimum payment must not be more than £10.
The Inland
Revenue will act as parent for children in care, with no responsible parent
(parents under 18 in
The product
is interesting. The key restriction is
the ability to manage an account for less than £3.75 per annum for the minimum
investment of £250 only. The potential
account size for contributions of £50 per month from families (say) is far
greater.
As usual,
this is a quick hack through complex regulations and cannot be taken as full
definition of what is said.