Savvy Money: Sorting out junior savings mess ought to be child's play
Solve the confusion by allowing transfers into Junior ISAs from their obsolete predecessor
Saturday 16 March 2013
The pressure is on Chancellor George Osborne to deliver a Budget that can stimulate the economy. But, among all the technical tax changes and macro-economic measures – I hope he also finds time to change the rules on Child Trust Funds, so they can be merged with Junior ISAs.
Child Trust Funds
Why? Well, if you're not a parent, the current – and clearly quite bonkers set of rules – may have passed you by. So, here's a recap.
The Labour government introduced Child Trust Funds (a tax-free savings and investment account) for children born from September 2002 to encourage parents and children to save, and around six million children have them. The main incentive was the £250 voucher given to parents to open the accounts.
Against the austerity backdrop, the coalition abolished Child Trust Funds in 2011 and introduced their replacement, the Junior ISA, later that year (minus the £250 freebie).
The problem is that children who have a Child Trust Fund can't also take out a Junior ISA; Child Trust Funds – like Junior ISAs – lock the money away until the child is 18, so they can't be cashed in early, and parents can't transfer money from a Child Trust Fund into a Junior ISA if they want to get a better return.
The Government made a halfhearted effort at joined-up thinking when Junior ISAs went on sale, equalising the amounts that could be saved into accounts every year (at the planning stage the limits were £1,200 for Child Trust Funds and £3,000 for Junior ISAs). But it didn't finish the job.
We know that banks, building societies and investment companies don't have the best track record when it comes to rewarding loyalty. Many would rather chase after shiny new customers than try and retain the ones they have by offering a decent return. And, to be fair to Child Trust Fund providers, these products can be expensive to run. That means Junior ISAs can pay better interest rates or offer better returns than Child Trust Funds.
For example, Nationwide's cash Junior ISA pays 3.25 per cent, including a bonus, but its Child Trust Fund pays 2.1 per cent, and the best-paying cash ISA from the Halifax (offering 6 per cent interest if the parent has at least £1 in an adult cash ISA with the Halifax) is significantly higher than anything you can get from a cash Child Trust Fund.
And while parents can switch between CTF providers, many aren't aware that they can do this and some providers that offer the best rates have banned transfers in.
It's not just that the interest rates can be low. Charges on CTFs tend to be higher. You can pay up to 1.5 per cent for a basic tracker fund if it's sold in a CTF wrapper.
Only last month, fund management firm F&C said it would start charging Child Trust Fund holders in its non-stakeholder funds a £30-a-year flat fee from 6 April. Parents who don't want to pay this charge will either have to move their child's money to F&C's stakeholder account or switch to another provider.
F&C isn't the only provider to impose a flat fee charge – Witan's Jump Child Trust Fund introduced a £36 annual charge around a year ago.
Merging accounts makes sense
Letting parents switch CTF money into Junior ISAs or allowing providers to merge these accounts is an obvious step. I'm resisting the temptation to say it's "child's play", but it seems like such a no brainer I don't know why the Government hasn't done it already. It wouldn't cost them anything and it could breathe a bit of life into the children's savings market.
Changing the rules would certainly go down well with parents. I carried out a poll on my website where around 95 per cent of voters said they thought they should be able to transfer existing Child Trust Funds into Junior ISAs. I've also had emails from parents who are frustrated that they end up with a mix of ISAs and trust funds with different providers.
The Government should change the rules as soon as it can so Child Trust Funds can be switched to Junior ISAs. The Treasury recently told me this was "under review". If it misses this opportunity, the Government will demonstrate that it has some pretty basic lessons to learn about how to encourage parents – and children – to see the benefits of saving.
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