Five questions on: Child trust funds

They're the old kids' savings schemes that Labour set up, aren't they?

That's right. There are estimated to be more than 6 million Child Trust Funds, which were started with a £250 hand-out from the Government when a child was born and then topped-up with another £250 hand-out when the child reached seven. The scheme was operated from 2002 and meant that all children born between September 2002 and January 2011 benefit from the Government cash.

What happened to the scheme?

It was scrapped by the Coalition Government as soon as they came into power in 2010. They were effectively replaced as tax-free savings schemes by Junior Isas in 2011, but parents weren't allowed to transfer money from a Child Trust Fund to the new accounts.

So what became of the savings in Child Trust Funds?

The savings rates started drifting downwards as those firms that offered them couldn't open new accounts while charges on Child Trust Funds invested in funds or shares drifted upwards. The net result was that they became expensive and inflexible and offering poor returns. In other words, children's savings were trapped in poor accounts.

Has that changed now?

Yes. Just before Easter, new legislation was finally passed to allow parents to transfer savings out of the poor old-style accounts into the newer, much more flexible Junior Isas. They work the same as normal Isas in that you can put savings into deposit accounts, or invest them in stock markets. However, the annual allowance – the amount you can stash into a Junior Isa on behalf of a child – is much lower, at £4,080 in the 2015-16 tax year, compared to the £15,240 adults can put into an Isa.

What sort of Junior Isa

should I choose? The top-paying Junior Isas are offering 3.25 per cent. "But parents should review whether they have the right investment strategy with their child's money," says Danny Cox of Hargreaves Lansdown. "80 per cent of Child Trust Funds are held in cash, when over the long term the stock market offers considerably greater rewards, though with more thrills and spills along the way." If you've lost the details of your family Child Trust Fund, you should be able to track it down at: hmrc.gov.uk/tools/childtrustfundclaim/ctfaccount.htm