More than half of parents and grandparents have stopped or cut back on investing into Child Trust Funds (CTFs), which were replaced by Junior Isas (Jisas) at the end of 2011, according to new research.
The Chancellor in his Budget responded to growing pressure to lift the ban preventing parents with CTFs from transferring the cash into Jisas, which offer more choice and better rates.
The Government has announced a 12-week consultation on allowing investors to transfer into Jisas from CTFs, which were closed to new account openings, though not to new contributions, in 2011.
CTFs have pulled in more than £4.9 billion since their launch in April 2005, and the savings of 6.1 million children could now potentially transfer into Jisas.
They allow parents and families to invest up to £3600 a year for a child, tax-free, with the money locked in for the child to access at 18 – though this feature has deterred many parents.
The research by Consumer Intelligence found 38% of investors had stopped putting money into CTFs, while 17% had cut back. About 12% of parents and grandparents said it was because their accounts were no longer competitive.
Graeme McAusland, chief executive of The Children's Mutual, which is dedicated to CTFs, said the product continued to be successful. "This year we have actually seen the highest level of customer payments into Child Trust Funds since they started and we very much want this to continue."
But the Treasury said: "Unfortunately since the launch of the Junior ISA, Child Trust Fund products have become second tier.
"In some cases interest rates offered by providers were lower on CTFs than on their Junior ISA counterparts, disadvantaging many children simply by virtue of their age."
Just one cash CTF pays 3% or more, compared with 12 Jisas, said Consumer Intelligence, while the typical charge on an investment CTF could over the course of 18 years "result in a pot of money worth £7500 less than for a child born a few months later who had a Junior Isa", according to Chelsea Financial Services.
Jason Hollands at advisers Bestinvest said: "CTFs have become a classic 'zombie' product with lack of competition and innovation, a dearth of mainstream providers, poor choice and high fees. Parents have been left with an intolerable situation where some children were stuck in these legacy products potentially until age 18, while their younger siblings have had access to considerably more attractive options available through Junior Isas."
Research by Bestinvest last October found some 44% of CTF providers had no product information on their websites and 74% of CTF accounts were invested in 'stakeholder' funds which could charge up to 1.5% a year for tracking the UK index.
"That is very high for this type of investment given that similar index trackers can be purchased within Junior ISAs for as low as 0.27% per annum," Mr Hollands said. But only 72,000 Junior Isas were opened in the 2011-12 tax year, representing its first five months.
The Association of Financial Mutuals, whose members run CTFs, said the transfer argument by many companies was "likely to be biased by commercial interests".
Martin Shaw, chief executive, said: "The Junior Isa may be an attractive option for more wealthy parents as a way of shielding more assets from tax by investing in the child's name, but it could leave many families worse off if forced to transfer."
He said the majority of people saving into CTFs were paying in £10 per month, less than the minimum premium in many Jisas."
But Neil Lovatt, sales and marketing director at mutual Scottish Friendly, said: "We've been calling for this change for some time.
"Doing so will invigorate the Jisa market, which desperately needs a reform of this nature if we are halt the ghettoisation of child savings as an upper to middle class tax break."
David and Jayne Lees from Newton Mearns, East Renfrewshire, have a Child Trust Fund for nine-year-old Rachel, but a Junior Isa for her 12-year-old brother Michael, and Mr Lees says Rachel is being left behind. "It is very easy for me to contribute into my son's fund but the same can't be said for my daughter's, and her's is falling behind.
"I am really glad to see this change."
The parents both have their own Isas and savings with Fidelity, so chose the stocks and shares Junior Isa from the same stable, and Mr Lees says: "The big advantage with my son's is I can view it all together with mine and my wife's, whereas for many years the CTF has been slipping and I can't get easy access to valuations."
He says stocks and shares are right for the long-term Jisa investment. "You wouldn't want to put it on deposit."
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