Hopes of junior ISA announcement

Updated: 

stacks of golden coins  euros

Savings experts have expressed hope that families with cash trapped in millions of children's savings accounts which are in a state of "terminal decline" will be allowed to transfer the money into better-value Junior Isas in plans announced tomorrow.

More than six million children hold a Child Trust Fund (CTF) and they are currently barred from being able to access a Junior Isa or Jisa, which is the successor tax-free children's savings account and tends to offer higher returns.

Both of these accounts lock cash away until the child reaches adulthood and speculation has been mounting that measures contained in Chancellor George Osborne's Autumn Statement will finally allow parents to be able to transfer cash from a CTF into a Jisa.

CTFs were an initiative launched by the previous government which initially gave vouchers to families to encourage them to kick-start a lifetime savings habit. Most children who were born between September 2002 and January 2011 hold such an account.

Junior Isas offer tax-free savings but without any Government cash contributions. Competition to offer the most attractive deals has been concentrated around Jisas in recent years, leading financial experts to raise concerns for the children stuck in CTF deals suffering worse rates.

The Government launched a consultation in May in which it said its preferred option would be to allow parents to decide whether they want to transfer funds out of a CTF and into a Jisa, with the possibility of a full merger of the two types of account being left open for a later date, depending on how the market develops.

Rachel Springall, spokeswoman for financial information website Moneyfacts, said the highest CTF rate on its tables is a deal at 3% from the Yorkshire Building Society.

But families saving into a Jisa could get double this rate from the Halifax, which offers a 6% return on a Junior Isa if the parent also holds an adult Isa with Halifax.

The Coventry and Nationwide building societies also offer Jisas which pay a rate of 3.25%.

Ms Springall said: "As Child Trust Funds have been left in the shadows, moving these accounts to Jisas will mean parents can be more active in saving for a brighter future for their child."

Up to £3,720 can be placed tax-free in a CTF or a Jisa in the current tax year. Funds held in a Jisa are automatically rolled into an adult Isa when a child reaches adulthood so they remain ring-fenced from the taxman.

CTFs were not set up in this way, although the Government has previously said it intends to change this before the first wave of CTF accounts mature so they can also be rolled into adult Isas.

Kevin Mountford, head of banking at MoneySuperMarket.com, said the rules preventing parents from switching from CTFs to Jisas have dampened competition within the children's savings market.

He said: "A Junior Isa can be a vital tool for tax-efficient savers and is great for parents who are starting planning for their child's future.

"With the increased cost of living and rise in university tuition fees, the earlier parents put their savings plan into action, the better start they can give to their children."

Jisas are open to child residents in the UK who were not eligible for a CTF, including those aged under 18 who were born before September 2002.

Financial services provider Hargreaves Lansdown recently analysed what happened to 837 Junior Isa accounts when the account holder became an adult and control of the account passed from the parent to the child.

It found that just 1% of 18-year-olds chose to cash in their Isa rather than keeping the money invested and one third decided to top up their accounts with their own contributions.

Danny Cox, head of financial planning at Hargreaves Lansdown, said: "Unfortunately the Child Trust Fund is in terminal decline, with many providers offering lower rates and worse choice than is available from Junior Isa.

"The likely result of the Government consultation is that transfers will be allowed from CTFs to Junior Isa and we are hopeful of an announcement tomorrow.

"This would be great news for over six million children with CTFs who currently risk being disadvantaged."

The Government's previous consultation document said that parents wanting to switch from a CTF to a Jisa would not be allowed to keep both accounts running at the same time because of the tax advantages of these products.

If they did want to switch to a Jisa, all of the money would need to be transferred and the CTF would be closed.

Keep more of your savings with a tax-free ISA