As the government finalises details of the new Junior Isa, fears grow that existing Child trust Fund (CTF) accounts will languish on lower rates than their new Isa counterparts.
Junior Isas to launch in November
Junior Isas are due to launch at the start of November. Eligibility will be backdated to January 2011, so that all children born since Child Trust Funds stopped accepting new deposits (in December 2010) have a tax-free home for their savings. Older children, born before February 2002 – the qualifying date for CTFs – will also be eligible to open a Junior Isa.
Junior Isas are very similar to CTFs, but have an annual limit of £3,000 rather than the previous £1,200 cap placed on CTFs. Money can be put into a cash Junior Isa or stocks and shares Junior Isa, or split between a Junior Isa of each kind. As the rules stand, you can transfer money from one Isa provider to another, but unlike adult Isas you can only have one Isa of each kind open at a time- so any transfer must be for the full amount accumulated rather than just the current year.
The big difference between CTFs and Junior Isas is that the new accounts will receive no government contribution. When they were launched, CTFs opened with a £250 government payment for every child. This was reduced to £50 in August 2010 and stopped altogether at the end of the year.
Child Trust Funds holders could miss out on £200m
Existing Child Trust Fund accounts can continue to receive new money (the annual limit will be increased to £3,000) and may be cashed in when the child reaches 18. They can be transferred to another CTF provider, or switched from a cash CTF to a stocks and shares CTF (or vice versa) but, controversially, they will not be able to be moved into a Junior Isa. Those who already have a CTF are not permitted to open a Junior Isa, so their choice of tax-free accounts is limited.
As Junior Isas are launched, the worry is that banks and building societies will offer better rates to attract new business than they are prepared to pay existing CTF customers.
Commenting on this possibility, Which? personal finance policy adviser Dominic Lindley said: ‘At the end of April 2010, around 5 million children held around £3.3 billion in Child Trust Funds. We are concerned that if these children are prevented from transferring to a Junior Isa then they may miss out on the best deals available.
‘Cash CTFs offered by several providers already offer worse terms than equivalent Isas. For example Nationwide offers just 2.1% AER (1.1% AER excluding the 12 month bonus) interest on its Cash CTF. By contrast it offers 3.1% AER (1.7% AER excluding the 15 month bonus) interest on its E-Isa and 2.73% AER (1.5% AER excluding the 12 month bonus) interest for those putting more than £1,000 in its Champion Isa.
‘There are also differences in charges between stocks and shares CTFs and stocks and shares ISAs. HBOS charges 1.5% a year for access to a FTSE 100 tracker fund within a CTF , but 1% within its Isa. However, there are far cheaper tracker funds available in other stocks and shares Isas- some of which have total charges of 0.3% a year.
‘If the difference in charges / interest rates between CTFs and Junior Isas is just 0.5% a year then we estimate that children with CTFs could miss out on over £200 million over the next ten years just on the existing money within CTFs (not including any additional contributions which may be made).’
Reforms required to assist shopping around
Not all CTFs offer poor rates, however. Before Junior Isas launch, it is possible to compare CFC rates and move to an alternative provider.
To facilitate more awareness of rates, Which? has called for all cash Child Trust Fund providers to include the current interest rate on paper and online statements. We are concerned that current guidance for notification of interest rate changes does not apply when there is less than £500 in the account. This may disadvantage those children where no additional contributions have been made to their CTF.
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