Child trust fund savings can be moved to Junior Isas

The Government finally allows parents to transfer child trust funds to Junior Isas, giving better rates and choice for 6m

Family with piggy bank
For the last two years, 6 million young savers have been trapped in child trust funds, which offer poor rates. Credit: Photo: ALAMY

The Government will allow millions of parents whose children have a child trust fund (CTF) to transfer the money to a Junior Isa, which offers better value for money.

For the past two years the Government has blocked parents from transferring money from a CTF into a Junior Isa and during this period, 6 million young savers have been trapped in poor rates.

George Osborne, the Chancellor, has announced that the Government will introduce the transfers in April 2015. He said parents may be able to get better returns on their investment, pay lower charges and have more choice of products by moving to a Junior Isa.

“The Government supports hardworking families who want to save for their children." he said. "So I’m delighted that, as a result of these changes, over 6 million children who currently have savings in a child trust fund will be able to benefit from better returns and lower charges on those savings in the future."

When the coalition Government came into power it replaced CTFs with Junior Isas, which offer young savers far higher rates.

The best CTF is currently from Yorkshire Building Society and offers 3pc interest. In contrast, the best rate on a junior Isa is double that at 6pc, available from Halifax.

Around 6.1 million children have approximately £5bn invested in a child trust funds. the Government has been under increasing pressure from industry and lobby groups to change its stance on CTF transfers.

It was expected to relax the rules in this month’s Autumn Statement, but Mr Osborne only confirmed that the Government would raise the Junior Isa and CTF annual subscription limits in line with the CPI measure of inflation. The 2014-15 limit has been increased from £3,720 to £3,840 for both products.

Danny Cox, head of financial planning at Hargreaves Lansdown, said: “This is great news. The days of the child trust fund have been numbered since the launch of the Junior Isa. Child trust funds have been in terminal decline since 2011, seeing millions trapped in expensive products or suffering lower interest rates than their Junior Isa counterparts.

“This change will pave the way for a significant improvement in choice and outcomes for over six million children and ultimately lead to a full merger. Transfers should happen from April 2015 and in the meantime, parents and grandparents who are saving into child trust funds for their children or grandchildren should continue to do so.”

However many argue the Government should have gone further and moved all child trust funds automatically into Junior Isas.

Jason Hollands, of investment firm Bestinvest, said simply allowing transfers is a "half baked measure".

"A bolder step would have been to merge the entire CTF edifice into the Junior Isa regime," he said. "Such a move would have really turned the heat up on the moribund CTF market. Instead these providers - many of which were simply allocated business from the state and did little to attract it in the first place - will benefit from inertia.

"Hundreds of thousands of children will remain stuck in a zombie scheme devoid of competition after this reform, with over 75pc of accounts being stakeholder accounts, nearly all of which are excessively priced trackers."

Child trust funds were introduced by Tony Blair's Labour administration, which gave parents of every child born in Britain from 2002 seed money of £250. Children were given another £250 when they turned seven, while some less well-off families received more.

The schemes were replaced by Junior Isas in November 2011, which across the board offer better interest rates and a far wider selection of investments. They are an extension of the existing adult Isa system, offering children tax-free savings accounts. Grandparents, parents or other relatives can save or invest up to the annual limit - £3,720 in 2013/14 - each tax year. When a child turns 18, the junior account automatically becomes an adult Isa.

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