‘Legacy is not what I did for myself. It's what I'm doing for the next generation.’
Vitor Belfort (Brazilian boxer)
At an online gathering on Saturday morning, we were encouraged to ‘think in terms of generations, not just moments’. The context in that event was how to make best use of old churches, with which the English countryside is richly endowed. The challenge is that, although half of all under-19s in the Oxford Diocese live in housing estates, 63% of those estates have no centre for Church of England worship. The resources to address the problem are in the wrong place.
The challenge of child poverty is very similar. There's lots of wealth in the United Kingdom, and Government does its best to level it down by taxing those ‘with the broadest shoulders’. But, although they pay lip service to tackling child poverty, their lack of action speaks louder than their words: that potential inter-generational inheritance is diverted to pay interest on the debt, mend the roads and help fund the dysfunctional NHS — so there’s very little levelling up for disadvantaged young people. No wonder farmers are up in arms about inheritance tax changes.
During the past week two written questions were asked in the House of Lords seeking answers to The Share Foundation’s two major initiatives: to enable low-income young people to receive the benefit of their Child Trust Funds by introducing a ‘Default Withdrawal at 21’ process for HMRC-allocated accounts, and to accept the major step forward that the charity has achieved with its incentivised learning programme for young people in care. Both questions were answered in the negative.
The truth is that the Government appears to have more interest in doing things for its current, self-interested agenda than for the next generation.
But it's time to look ahead in order to learn from what was done by the previous Labour government, and to show how future generations can benefit; even if it was down to philanthropists to make the change, rather than the current Labour government.
Let's first gather up what we've learned over the past two decades. The biggest initiative to stop child poverty extending into young adult poverty over this period was the Child Trust Fund, the scheme which has enabled over six million children born in the United Kingdom between September 2002 and January 2011 to have a starter capital account opened in their name. There are three major lessons to learn from this experience, apart from the fact that young adults, understandably, find it quite difficult to relate to the scheme’s name (Child Trust Fund).
The first is that it was designed to be universal, no doubt reflecting the socialist origins of the Labour Party. It did have a progressive element, so that a child born into a family in receipt of Child Tax Credit received double the normal starting contribution; but the whole scheme cost far too much as a result — over £3 billion. It therefore provided accounts for a very large number of young people whose families were well able to afford their own saving, and was considered unaffordable by the incoming coalition government in 2010.
The second problem was that there was no provision in the legislation for releasing the funds to young owners of HMRC-allocated accounts. HMRC allocation was how most accounts for children in low-income families were opened, because their parents, having no experience of savings or investment, had taken no action by the child’s first birthday. As a result there are already about 300,000 low-income young adults unaware of their unclaimed accounts worth a total of nearly £1 billion. This is the reason why The Share Foundation continues to push hard to have a release mechanism introduced: hence the first of those two written questions in the House of Lords.
The third problem was that there was no organised provision for learning financial life skills built into the scheme’s design. As a result, financial awareness for young people is no better today than it was twenty years ago: to hand out ‘asset welfare’ without such a training programme was a major opportunity lost. That's why The Share Foundation’s development of incentivised learning for young people in care is such a valuable experience, in order to show how to deliver financial education successfully for disadvantaged young people in the future.
So, it’s time to plan for that future — we need a new, targeted programme for starter capital accounts going forwards, which will also provide a strong lead for inter-generational rebalancing across the world. It's going to cost a fraction of the Child Trust Fund, because it would only apply to low-income young people; there would therefore be about 250,000 accounts opened for each annual cohort.
If each account received a starter payment of £500, the annual cost would be in the order of £125 million. At an appropriate stage in the young person's adolescence (probably 13-17), there would be an incentivised learning financial awareness programme which would offer the opportunity to benefit from an additional £1,500 on an ‘earn as you learn’ basis. The cost would, of course, depends on the number of participants, but if a third of the recipients earned an average of £1,000 each, that would add an annual increment of c. £85 million.
All of the accounts would be HMRC-allocated, and the enacting legislation would include a ‘Default Withdrawal at 21’ provision to ensure that the value in the accounts was delivered to young adults at a time when it could make a major contribution to their life prospects. The accounts would all be stockmarket-invested, so it would be reasonable to expect c. 7% annual growth over twenty years. If the financial life skills programme were included, the value of accounts at maturity would therefore be in the order of £2,500 - £3,000.
With cross-party agreement to support its establishment, this major contribution to relieving child poverty and reducing NEET status for young adults could be a continuing feature of UK inter-generational rebalancing. Its annualised cost of less than £250 million would use less than 3% of the receipts from inheritance tax as at the end of this parliament: but, of course, the present Government might reasonably choose to ‘fill the gap’ between Child Trust Funds and eligibility for the new scheme, which would involve a one-off commitment of c. £1.5 billion. We would also expect the current proposals from The Share Foundation for release of existing HMRC-allocated accounts, and for incentivised learning for young people in care, to be accepted as part of the new arrangements.
And what if the Government continues to back away from relieving child poverty in this way? It’s not inconceivable that the annualised cost of c. £250 million could be raised from philanthropists who believe, like Vitor Belfort, that their legacy is what they do for the next generation. If this amount were raised from charitable donations in legacies, it would result in inheritance tax on their estates of £810 million (£2.25 billion x 36%) being paid as opposed to £1 billion (£2.5 billion x 40%), thus saving in tax more than three-quarters of the amount gifted to finance the scheme.
We can break the cycle of deprivation. We just need the will to do it.
Gavin Oldham OBE
Share Radio