No longer trapped in Child Trust Funds

Updated: 

Osborne Christmas Party

George Osborne has said that children with Child Trust Funds will no longer be trapped in accounts with high charges or limited ranges, because they will finally be allowed to switch their accounts into Junior ISAs.

So what does this mean for children?

CTFs

Child Trust Funds were set up with something of a fanfare in 2002 - giving every child £250 at birth and allowing them to save of invest tax-efficiently. In return the money had to remain in the CTF vehicle until they were 18. There was broad support from providers, and a wide range of choice from savings accounts to share-based funds.

However, in January 2011, the government stopped making payments into CTFs, and signed the death warrant for the industry. They also introduced Junior ISAS.

Without the benefits of economies of scale, the CTF charges started to rise. F&C, a provider which had offered one of the broadest ranges, introduced a £30 annual fee, which would wipe out a typical savings pot in less than ten years

And without the incentive of attracting new customers, accounts started offering lower interest rates too. So, for example, the best Junior ISA cash savings rate is 6%, while the best CTF savings rate is around 3%. It meant six million children were trapped in under-performing vehicles.

Switch

There has been a sustained campaign to allow children to move from CTFs to Junior ISAs, and the government held a consultation to examine the potential implications. However, after no announcement was forthcoming in the Autumn Statement, campaigners started to lose hope.

Now Osborne has told the Daily Mail that the switches will be possible from April 2015. He said it would support 'hard-working families' and added: "I'm delighted that, as a result of these changes, over six million children who currently have savings in a CTF will be able to benefit from better returns and lower charges on those savings."

Danny Cox, Head of Financial Planning, Hargreaves Lansdown said this was great news. "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 6 million children and ultimately lead to a full merger."

He added: "Transfers should happen from April 2015 and in the meantime, parents and grandparents who are saving into Child Trust Funds for their children or grand-children should continue to do so."

Providers are pleased too. Guy Simmonds, Nationwide's Head of Product, Protection and Investments, said: "As one of the largest providers of both CTFs and JISAs, Nationwide has consistently echoed our members' call for more flexibility in the way they save for their children."