Many 'average' families will be hit hard by Conservative plans to abolish child trust funds (CTFs) payments, if the Tories are elected.

During the party's annual conference this week, shadow chancellor George Osborne said the Conservatives would end payments to most children from families who earn over £16,040 a year.

This would mean around two thirds of households would no longer be eligible for these handouts (see the Best Child Trust Fund guide). The Tories insist the cuts are vital to help slash the national debt.

Under the scheme, every parent gets £250 to put in trust (or £500 if household income is less than £16,040) on the day their child is born, and again on their seventh birthday.

The plan is to maintain the £500 payments for the same group but scrap all other handouts.

John Reeve, head of investment firm Family Investments, says: "The CTF scheme can be improved but this does not mean it should be scrapped for the majority of children.

"It is not just the super-rich who lose this benefit; it will be millions of children from average, hardworking families."

How CTFs work

The cash has to be saved or invested in a fund that can only be accessed by the child at 18, with the returns being tax-free.

You can top up the fund with up to £1,200 a year yet remember the money will be completely in the child's name so you have no control over their subsequent spending (explained in the Best Child Trust Fund guide).

Dan Plant, money analyst, says: "CTFs have their problems, not least of which your savings for their college fund may be spent in a day on an Xbox or world trip.

"However, the £250-£500 vouchers are free money given back to families by the Government, so for anyone to lose that extra boon is a big shame."

Parents have a year to chose which type of savings vehicle to stash the cash in otherwise the Government will pick an account which may result in a poor interest rate.

The funds themselves will be maintained, even though many payouts will be scrapped.

'Massive savings'

Osborne believes the cuts would save £300 million a year.

He says: "Quite frankly, CTFs have not been as successful as many like myself hoped. We should continue paying them to the poorest families who often have no savings, and encourage them to use them more.

"But handing out new baby bonds to the rest of the country is a luxury we can no longer afford."

Further reading/key links

Get the best rate for your child's savings: Child Trust Funds
See what you're entitled to: Five-Minute Benefit Check
Claim free childcare cash: Tax Credits