Thursday, 29 March 2007

Saving for Children in the UK Compared to Canada

It has been an eye-opener the last few days doing research for some of my Scottish relatives into the Child Trust Fund program (CTF) that exists here in the UK and comparing it to the closest Canadian equivalent, the Registered Education Savings Plan (RESP). The UK government created the CTF only in 2005 - one wonders whether the policy makers took a look at the RESP and decided to simplify and improve it.

The key common point is that both the CTF and the RESP are tax-protected savings accounts for the future of children. Both also enable savings into various types of equity holdings (stocks, funds, ETFs) and fixed income (bonds, bond funds, guaranteed savings). And both receive some direct contribution of funds from the government.

But the differences between the programs abound:
  • RESP is intended to be used only for higher education (and tax-exempted accordingly) while the CTF can be used for anything; score one point for the CTF
  • CTF receives from the UK government only £250 at birth of the child and another £250 at age seven, while the CESG from the Canadian government to the RESP can be up to $400 per year, soon to be $500 according to the March 19 budget (though the lifetime limit remains at $7200); score one for the RESP
  • CTF annual contribution limit is £1200 (about $2700 at today's exchange rate) while the RESP's is $4000, a cap that the budget also eliminates; score one for the RESP
  • CTF ends at age 18 but RESP can exist gaining tax-exempt income till age 25; score one for the RESP
  • CTF assigns ownership to the child from the beginning and the money is locked into the account (except for terminal illness, in which case funds can be used early) till 18, but the RESP doesn't prevent early withdrawal, a flexibility advantage, though the effect of CESG needs to be considered (see HRDC website); debatable which is better, score it even.
  • CTF on maturity passes directly to the child to do whatever he/she wants while the RESP is still controlled by the Plan holder (most likely a parent); here's a good debating point! should an 18 year-old be put in full control of a potentially large sum to do whatever with, no accountability to anyone required? my view, with my limited experience of my own kids is, they learn to do it, just like they learn to pick up after themselves when they move into their own place; score one for the CTF
  • CTF withdrawal is simple and straightforward while RESP is complex and time-consuming with bad consequences if done the wrong way (all that keeping track of CESG vs capital contributions vs income and the proper withdrawal sequence ... ouch it's a bureaucratic nightmare); score one for the CTF
  • CTF has three sorts of mandated account types (see the first CTF link above for details) that allow easy choice amongst them according to risk preferences and easy comparison within an account type while the RESP multiplicity of investment vehicles is complex and time-consuming to figure out (to see what I mean check out this discussion on MillionDollarJourney's blog); the UK government has succeeded in establishing a level playing field for the CTF that seems to meet general approval, including mine, which counts the most of course ;-) score one for the CTF
  • CTF's account-fee cap of 1.5% on the Stakeholder account type, which minimizes profit prospects for providers, has oriented them to offer index-tracking equity funds rather than actively managed funds, which are more likely to under-perform the index; score one for CTF
  • CTF and and Human Resources Development Canada (HRDC) both provide listings of approved providers of the respective plans but CTF shows the types of plans of each provider and gives some guidance on how to choose; score one for CTF
  • CTF lowest cost self-directed provider of an index tracker fund that I found at the Share Centre comes at about 1.03% total annual fees while for an RESP there is TD CanadaTrust's eSeries which vary from 0.33% for the Canadian Index to 0.48% for the US currency hedged (S&P500) Index or the International MSCI EAFE Index; too bad a CTF holding has to be traded on a UK exchange!; on top of that, there's only fund as cheap here in the UK so one cannot diversify beyond the UK FTSE index; score two for the RESP
  • UK telephone helplines of both regulators and providers of CTFs are answered quickly
    (within seconds generally) by knowledgeable personnel without going through menu trees and such, while in Canada one can easily wait for minutes (it was about 10 minutes for TD CanadaTrust) or reach only an answering machine; score one for the UK
Overall, the RESP seems better for people like me (because my kids have gone on to university) than the UK's CTF, but what a hassle compared to the UK!

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