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No progress on Child Trust Funds

THE build-up to last week's Autumn Statement was dominated by speculation on how the Coalition planned to tackle energy prices.

Less coverage was devoted to another policy area which could also make a big difference to millions of people.

The rules governing Junior Isas (individual savings accounts) may not be as emotive as fuel bills, but they have potential to make a big difference to those who save on behalf of their children.

Despite persistent lobbying by the investment community, the Chancellor has so far failed to come to a decision on whether young people who have been saving into Child Trust Funds (CTFs) can now transfer to a JIsa. The decision was expected following a Government consultation on the question, which closed on August 6.

CTFs have been around since 2004, when the scheme was launched by the then Government as a tax-efficient way to save for children.

Children born from September 1, 2002 and onwards received a £250 government voucher to start their fund, which could then be topped up by deposits. The idea was to give people access to a financial asset by the time they reached adult age.

However, the scheme was closed to new entrants on January 3, 2011 as part of the Coalition's attempts to cut the deficit, with the Government forecasting that the cost would have risen to £500 million by 2012-13.

JIsas were launched as a successor, but, frustratingly for many savers, the Government's eligibility criteria ruled out allowing children who hold a CTF to also hold a JIsa for the same child (though people could continue to pay into existing accounts).

There are similarities between the two products. In both cases, savers are locked in until the child reaches 18, and the accounts are subject to a maximum annual contribution of £3720 (£3480 from April 6, 2014), which can be invested in cash or stocks and shares.

But there are key differences, not least of which is the fact the Government is no longer contributing.

Campaigners had been frustrated by the fact that more than six million children between two and 11 who have CTFs are getting a worse deal than they might have had with a JIsa. Much is down to a lack of choice and competition in the CTF market. Adviser Bestinvest identified a "dearth of mainstream providers" of CTFs, with almost one-quarter being Welsh credit unions: while there are 70 providers of CTFs, those eligible for JIsas could chose from as many as 2000 funds.

Bestinvest also noted 44% of CTF providers did not include details about the products on their websites, and three-quarters of all CTF money had been parked in default or "stakeholder" accounts, which can charge an annual fee of 1.5%.

Jason Hollands at Bestinvest said: "Despite the statutory cap on management fees for stakeholder accounts, our research has clearly highlighted that most are index trackers, charging the maximum 1.5% allowed under the cap. This is high for an index fund, and many of the underlying index managers are the same firms."

Danny Cox at investment giant Hargreaves Lansdown, said: "Running two separate schemes adds complexity and doesn't encourage a savings culture. Unfortunately, the Child Trust Fund is in terminal decline."

Jason Chapman, managing director at discount brokers Willis Owen, said: "We want the Chancellor to clarify whether money held in Child Trust Funds can be transferred into Junior Isas as soon as possible, to end the uncertainty and let parents get on with saving for their children's future."

CASE STUDY

Jamie Bradley, aged three, from Danderhall, Edinburgh, already has a child trust fund, but now he has also been enrolled into Royal Bank of Scotland's newly launched First Saver account.

He is pictured with his free "Pigbybank", one of six savings characters designed for RBS by Wallace & Gromit maker Aardman Animations.

An educational smartphone app - an interactive game also designed by Aardman and aimed at teaching children about saving money - will also be available later this month.

Jamie's mum, Suzanne Bradley, said: "I try to teach Jamie about saving, but he's only three, so he doesn't really understand the concept quite yet.

"I think First Saver and Pigby will help and when he gets money for his birthday and Christmas I will encourage him to save it."

The account currently pays 1% to children under 16 on balances up to £25,000.

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