This change means nearly £5bn in CTFs will next year no longer be trapped in these accounts, which have been suffering a slow decline since the government stopped issuing £250 vouchers to newborns two years ago. Moving over to Jisas should mean far better rates for young savers.
But the announcement does not mean the end of the CTF. They could continue to linger on even beyond next year, a sad relic of a wealthier time when the government could afford to hand out cash to babies.
The Chancellor’s careful announcement does not close down CTFs. It simply gives those children with parents who are switched on enough with their finances to move them to Jisas.
Those with less engaged parents will still have their money in CTFs as there is no compulsion to move. Nearly 30 per cent of CTFs are in default stakeholder accounts because the parents did nothing with the vouchers a year after they were issued. What chance is there that these parents will next year bother to shift their children’s money into a Jisa?
Looking back at CTFs now, nine years after they were launched, it is difficult not to conclude that they were a bit of a failure. The idea of CTFs was that if given a monetary kick-start, parents would save for their children’s futures. When they started in 2005, all qualifying children born after September 2002 were given vouchers for at least £250 (£500 for poorer families).
The money had to go into a CTF and would remain there until the child was 18. Further payments would be made as the child grew older, and relatives and friends could boost savings by at first up to £1,200 a year.
Sadly, few did bother to add extra money: HMRC figures show that only 21 per cent of CTFs were topped up – and then by typically around £300 a year.
By 2010, the Coalition Government had had enough of CTFs. At first it cut its voucher contributions and then stopped them in 2011. The previous year, it introduced Jisas. These did not involve cash vouchers, and without the “bribe” it has meant only around 300,000 Jisas have been opened with total deposits of around £550m.
And crucially, when the government brought in Jisas it did not let those children born between September 2002 and January 2011 who had received CTF vouchers open them. Nor could they transfer over their accumulated CTF money into Jisas.
This left the 6.1m children with CTFs trapped in “zombie” accounts, unable to take their money out or transfer it into Jisas. And with the best CTF account paying just 3 per cent compared with 6 per cent for the top Jisa, it is easy to see why those parents with “trapped” CTF children have been up in arms.
Added to that, there is scant competition for CTFs so there has been little opportunity to move to better CTFs. Those parents who chose investment or stakeholder CTFs may also have found rising charges and low returns – but have been powerless to do much about it.
And until last month, it seemed as if their cries were falling on deaf ears. Yet even though there were murmurings that CTF holders had got an incentive in the form of the vouchers – while those with Jisas had not – the demand to free these children’s accounts gathered support. Two days before Christmas, the Chancellor unveiled his present to those affected. In his statement he said: “The government supports hardworking families who want to save for their children.
“So I’m delighted that as a result of these changes over 6m children who currently have savings in a Child Trust Fund will be able to benefit from better returns and lower charges on those savings in the future.”
Broadly speaking, the news has been welcomed by commentators. Danny Cox of Bristol-based Hargreaves Lansdown said: “The days of the Child Trust Fund have been numbered since the launch of the Junior Isa. CTFs have been in terminal decline since 2011, seeing millions trapped in expensive products or suffering lower interest rates than their Junior Isa counterparts.”
But others do not think the government has gone far enough. One of the problems with CTFs is they failed to capture the imagination of many parents, with the result that they did not choose where the CTF voucher should be invested. If after a year the CTF money had still not been invested, the money was put in a stakeholder fund with one of the panel of providers on the government’s list.
Jason Hollands of London-based investment firm Bestinvest has described allowing CTF transfers from next year as a “half-baked measure” because it will not do anything to force those with the accounts to move over. He added: “Hundreds of thousands of children will remain stuck in a zombie scheme devoid of competition after this reform, with over 75 per cent of accounts being stakeholder accounts nearly all of which are excessively priced trackers.”
Instead, he said the government should have just merged all CTFs into Jisas. “Such a move would have really turned the heat up on the moribund CTF market. Instead these providers – many of which were simply allocated business from the state and did little to attract it in the first place – will benefit from inertia.”
As the government statement said, there will simply be an “option to transfer”, only parents who can be bothered will move their children’s money to Jisas. This could mean many children remain stuck in CTFs because there will be no automatic movement.
Some of these children are likely to be those from poorer families who could probably most do with a nice lump sum when they reach adulthood. Figures show that of those CTFs that received the higher voucher payment of £500, more than a third simply went into the default stakeholder plans because their parents did not do anything with the vouchers. And only 1 per cent of such accounts received extra payments from these parents.
And while the movement of the money from CTFs to Jisas should happen in the same way as between Jisa providers, there is a concern this may not happen so smoothly. In addition, just as with adult cash Isas, Jisa providers do not have to accept transfers in. Given that only a fifth of CTFs had money beyond the government payments added, it is potentially a lot of administration involved for small balance accounts.
But accepting in CTF investments into Jisas could be good business going forward. The maximum contribution into a Jisa this tax year is £3,720 rising to £3,840 from April 6. Incentivised by better rates or improved investment charges than they received in CTFs, there is a chance that parents of those freed next year will be keen to add to their children’s accounts. Whether those parents who largely ignored CTFs will give their children’s savings a second chance with Jisas remains to be seen. Much could depend on how the savings and investment industry promotes the option to transfer next year.
Charlotte Beugge is a freelance journalist
Key points
George Osborne announced at the end of last year that Child Trust Funds can be transferred into Junior Isas from 2015.
Looking back at CTFs now, nine years after they were launched, it is difficult not to conclude that they were a bit of a failure.
Accepting CTF investments into Jisas could be good business going forward.
