Baby Bonds: A long-term tax-free savings account for children (2005-2011)

The UK Baby Bonds scheme, formally known as the Child Trust Fund (CTF), was a government savings and investment program for children born to low-income families between September 1, 2002 and January 2, 2011 in the United Kingdom (UK). The program provided parents and guardians with an initial deposit of GBP 250 (USD 313) or GBP 500 (USD 626) and ongoing government contributions. Ultimately, this scheme aimed to provide young adults with a one-off payment when they turned 18.

The government set a goal to ensure that “all children grow up knowing they have a financial stake in society” and that every young person “should have a financial asset to invest in their future” as they transition into adulthood.¹ The Child Trust Fund (CTF) was designed to be integrated with the National Curriculum’s financial education component, demonstrating the tangible benefits of saving to children and their families. The government outlined four main objectives for the CTF legislation:² 

• Promote awareness of the benefits of saving and investing.

• Foster a culture of saving among parents and children while encouraging their engagement with financial institutions.

• Ensure every child possesses a financial asset at the onset of adulthood to support future investments.

• Enhance financial education, enabling individuals to make informed financial decisions throughout their lives.

Every child born between September 1, 2002, and January 2, 2011, automatically received a voucher of GBP 250 (USD 313) for most children, or GBP 500 (USD 626) for low-income families who qualify for full child tax credit—around one-third of all families—to open a CTF account.³ If parents did not open an account, the government would establish one on the child’s behalf. Parents could contribute up to tax-free GBP 9,000 (USD 11,276) per year. Children received an additional GBP 250 (USD 313) on their seventh birthday (or GBP 500 [USD 626] for low-income families), though this bonus was discontinued for those turning seven after August 1, 2010.

Funds in a CTF account were locked until the child reached 18. At age 16, children could assume control of their CTF by becoming the “registered contact.”

While the scheme is no longer active, children with existing CTF accounts can continue using them until they mature or transfer the funds into a Junior Individual Savings Account (Junior ISA). Although the government stopped further contributions, the existing six million CTF accounts were allowed to continue. The first CTFs matured in September 2020, and the final CTFs are expected to mature by 2029.⁴ 

Implementation

In 2001, the British Treasury released a report highlighting how families and children living on low incomes were often excluded from the benefits of investment and savings accounts. In response, the government proposed the Child Trust Fund (CTF) program in 2003 to ensure that every young adult, regardless of their family’s financial circumstances, would have immediate access to a savings account. By the program’s fifth anniversary in 2010, more than five million CTF accounts had been established. 

The private sector played a crucial role in shaping and implementing the CTF program. Financial institutions were key to its success, as families redeemed their CTF vouchers by opening accounts with participating banks. These private sector institutions were responsible for various tasks, including marketing the accounts, processing contributions, managing investments, and issuing annual statements to account holders.

However, in 2010, when the Conservative Party formed a coalition government with the Liberal Democrats, they introduced austerity measures, resulting in significant cuts to public spending.⁵ As part of these measures, the government reduced payments to the Child Trust Fund (CTF) and eventually discontinued the program. In addition, they implemented regular freezes to child benefits, which are now (as of 2024) worth 20 percent less than they were in 2010.⁶ The government also ended Educational Maintenance Allowances (EMAs), a cash transfer program that incentivized 16 to 18 year olds to remain in education.⁷ 

Cost

Between 2005–2006 and 2011–2012, the UK government contributed GBP 2 billion (USD 2.5 billion) to Child Trust Funds (CTFs), resulting in 6.3 million accounts being opened.⁸ As of April 5, 2021, GBP 394 million (USD 493 million) remained unclaimed in matured CTF accounts belonging to young adults who had turned 18 between September 1, 2020, and April 5, 2021.⁹ 

In its first year, the CTF program incurred a cost of GBP 444 million, covering all children born between September 2002 and the program’s launch in 2005. From Fiscal Year 2005–2006 to 2008–2009, the program’s annual cost averaged GBP 255 million. The program was later expanded to include an additional payment when children turned seven. By Fiscal Year 2009–2010, the total cost of the CTF program had risen to GBP 387 million.

Assessment

In reality, the CTF program led to the opening of many more savings accounts, significantly increasing the level of savings for poorer families who otherwise would have had none. While the lump sum may have been modest, it represented a critical amount for families with limited disposable income. Ultimately, this policy alone, especially following its discontinuation, could not substantially reduce the inequalities between low- and higher-income children. Its cancellation coincided with broader cuts to redistributive measures, contributing to the rise in child poverty since 2010. Nevertheless, the CTF was a meaningful step forward.

Before the program, only 14 percent of children had any savings, with a median amount of GBP 300 (USD 555).¹⁰ By 2006, over 1.3 million accounts had been opened, and more than 611,000 additional payments had been made to children from lower-income families.¹¹ Most parents (74 percent) actively opened their child’s accounts, and 24 percent of accounts received additional contributions from parents, relatives, or friends. On average, GBP 289 (USD 535) was added annually to each account.¹² Notably, while the average annual contribution was GBP 321 (USD 594) for better-off families, it was considerably lower—GBP 188 (USD 348)—for children from low-income households.

Despite this disparity, the program had the most significant impact on children from low-income families, single-parent households, and those renting their homes. The initial GBP 250 (USD 463) government contribution for many of these children was their only savings, offering a small but crucial financial foundation.¹³ This creates a complex picture: children from poorer families benefited from the policy, as most would have had no savings without it.

The Children’s Mutual, a major CTF provider, reported that 30 percent of households with incomes under GBP 19,000 (USD 35,150) saved an additional GBP 19 (USD 35) per month for their children.¹⁴ This indicates that the program modestly fostered regular savings habits, which could offer long-term benefits as these children reached adulthood.

However, the program faced challenges. Many accounts remain unclaimed, with many families unaware of their existence or how to access the funds. Around 15 percent of families with eligible children were unaware of the CTF when initially interviewed—a concern particularly pronounced among low-income households, where the program’s impact could have been most profound.¹⁵ 

While the CTF made strides toward promoting financial inclusion, its ultimate success in reducing inequality was limited by unequal contributions and its discontinuation before it reached its full potential.

Plant growing in savings coins with nature background. ©Adobe Stock/Pituk

Tags

• Children & Youth
• Europe
• Future Generations
• High-Income Country
• Income & Wealth
• United Kingdom