New Junior ISA rules `unfair' to children with CTFs

What impact will the introduction of Junior ISAs have on you if you've already opened an CTF for your child?

November 1st marks the launch of the Junior ISA – which means anyone whose child was born after 3 January 2011 will be able to open an Junior ISA on this date, as will anyone whose child did not receive a Child Trust Voucher (so children born before September 2002).

But what about all the other children in the UK?

The bad news is, the 5 million or so kids who received Child Trust Fund vouchers will not be allowed to open a Junior ISA, even if the vouchers have not yet been invested.

What’s worse, there is currently no sign that parents will be allowed to convert their child’s CTF to a Junior ISA in the future.

Here at lovemoney.com, we believe this is incredibly unfair. Savings providers are bound to concentrate their attention on the new Junior ISAs, meaning the CTF range and rates offered are likely to suffer – and 18 years is a long time to tie up cash in a rubbish account.

We want the rules to change!

We want the Government to see sense and change the rules preventing parents from switching from CTFs to Junior ISAs - which will also succeed in streamlining and simplifying the whole process.

CTFs were badly thought-out and overly-complicated. Letting everyone switch to a Junior ISA is the obvious solution. The maximum contribution limit (£3,600 per tax year) is the same for both CTFs and Junior ISAs, and no new CTF vouchers will be issued in the future, so the schemes are identical in every way except for their names. It would just be a matter of allowing savings providers to move the accounts that will all have already been opened anyway.

All of my children have CTFs and so naturally I feel very concerned about the future of this scheme - and I’m sure I’m not alone. In fact, we've already had two people write in to tell us they feel the same (particular thanks go to lovemoney.com reader Dennis Curley for inspiring this article). What do the rest of you think? Please share your thoughts using the comments box below!

What can I do if I’m stuck with a CTF?

The only good news is that, at the moment at least, there are still some healthy Cash CTF rates available, as you can see from the table below:

Top Cash Child Trust Fund accounts

Source: eMoneyfacts

How long competitive CTF rates will stick around, however, is anyone’s guess.

If you are thinking of taking out one of these accounts, bear in mind none of the top five are operable over the Internet.

For example, table topper Hanley Economic BS pays 5%AER, although it can only be opened in branch. And although it allows transfers out, strangely it’s the only account that doesn’t allow transfers-in.

Share Child Trust Funds

History has shown that over every 18-year period, shares have outperformed cash, which is why many parents plump for an equities option. But of course, the stock market is not without risk.

Experienced investors may find the Non-stakeholder account preferable as you can pick your own shares (within those offered).

But the Stakeholder share account can be seen as a happy medium – your child will still be investing in the stock market but his cash will be moved to lower risk investments when he turns 13.

You can find the full list of CTF providers here, plus a list of Stakeholder and Non-stakeholder accounts.

Watch the charges!

But of course, as well as choosing the right funds keep your eye on the charges. Higher charges mean less profit for your child, and CTF fund charges can be unfairly high, when compared to other investments.

If you’re keen on a Non-Stakeholder account, Selftrade and F&C offer good choices of funds and relatively low charges.

As for a Stakeholder option, a good option can be a tracker fund. F&C, Selftrade, Halifax and the Share Centre each offer FTSE All Share trackers.

Personally, with 18 years to go, a shares based scheme was the obvious choice for me when my three children received their CTF vouchers.

Opening your child’s CTF with a £50 voucher and saving the current maximum of £100 per month (assuming 5% growth after charges) could result in a lump sum of over £35k when he turns 18. Not bad!

What if my voucher has expired?

The government automatically opens a stakeholder CTF account for you if you fail to before your voucher expires. But you obviously have no say in where your child’s cash is invested – and a poor performer could cost your child valuable interest!

But fear not, you are not stuck with the account you (or the government) first opened, as it’s easy to move to another CTF.

The vouchers are valid for 12 months and ceased being offered in January 2011. So if you were issued with a voucher late last year but haven’t opened at CTF yet, you have just a few months left before the decision is taken out of your hands.

In the meantime, here’s hoping the government will see sense and allow all children the option of converting to a Junior ISA. Watch this space!

Find out about competitive children’s savings plans

More: Earn up to 6% with a Junior ISA |Give your child £95k, tax-free with a Junior ISA