Junior ISAs to accept 'stuck' Child Trust Fund cash
LAST week's budget included some good news for parents 'stuck' with money in the Child Trust Fund (CTF) market.
Within a year - after a three month consultation and some time for new legislation to pass through parliament - CTF holders should be able to move their money into Junior ISA accounts offering higher interest rates in a more competitive market.
About six million children currently have money invested in CTFs, £4.9bn worth of savings in all, according to Treasury figures.
A recent Lloyds TSB survey found that, of the 83% of parents with children aged ten or under who have savings for them, almost three-quarters had set aside money in a CTF.
Getting out of CTFs
Lacking the buoyancy of new account holders, however, the CTF market is slowly seizing up.
Most children born between 1 September 2002 and 2 January 2011 were eligible to open an account.
But now interest rates on many accounts are low and some providers have added charges for savers too.
For example, F&C Investments, one of the largest Child Trust Fund managers, recently introduced a £30 annual charge on many of their plans.
78% of CTFs are stakeholder accounts, an option somewhere between cash and stocks and shares where the money is invested and earns a higher rate than cash but is subject to Government rules that reduce the risk of investing.
Stakeholder account providers can charge a maximum of 1.5% a year in fees for these accounts, lower than many non stakeholder CTF accounts but more than some alternatives.
Most see the opportunity to move CTF money into junior ISAs, the CTF's Tory successor, as a simple solution.
In to Junior ISAs?
However, the Junior ISA market has problems of its own.
The same Lloyds TSB survey mentioned above also found that just 7% of parents saving for their kids held a junior ISA.
A year on from their launch, less than 3% of eligible parents had put away tax-free cash for their children into the accounts.
There are a few reasons for that.
First, this is simply a new market. The creators of the junior ISA scheme expected that competition within the market would get the word out more effectively than a Government campaign, the fact that the ISA market is well established would increase understanding and competition would increase rates of return.
In practice, the market was slow to get its act together.
Second, CTFs kick started saving for young people with a cash bonus of £250.
Without that incentive, junior ISAs can appear no more attractive than standard ISAs or other savings accounts, especially given that many other accounts for children can be made tax free and are more easily accessible.
Finally, like CTFs, parents save into junior ISAs in their child's name; the money will be released when the child turns 18 and will be theirs to spend as they choose.
Parents who remember themselves at 18 are understandably jittery about losing control of their savings.
It's also worth noting that, although CTF holders feel trapped, they may be overestimating how much more money saved in a junior ISA would make.
Halifax, for example, are currently offering a junior cash ISA paying 6%, by far the highest rate of return for cash, but the rate is only available to those who already have a Halifax account.
In reality, most junior ISAs are paying up to 3.25%, with many providers hovering around that rate, and CTFs are paying up to 3.05%.
It's not a huge difference.
Last gasp for CTFs
Most CTFs have just the Government's initial £250 investment sitting in them.
While proactive parents will be glad that they can move their CTF cash into junior ISAs many more are unlikely to bother.
Ultimately, however, it may turn out that all parents need to do to get their money into junior ISAs is wait.
Though it's only speculation at this stage, the Government consultation could choose to move all children's savings into one unified scheme.