The government is to consult on allowing money held in child trust funds to be transferred to junior Isas.
The move, if approved could give a huge boost to parents saving on behalf of their children, as the interest paid on junior cash Isas is typically much higher than that paid on child trust funds (CTFs).
CTFs were introduced in 2005 with the aim of helping children save tax free towards the expenses they might face in their late teens and early twenties, such as college fees.
The Government made two contributions of £250 (£500 for children from low income families) at birth and again when the child reached his or her seventh birthday.
Friends and family could also contribute up to £1,200 a year to the scheme in addition until the child reached his or her 18th birthday. Money could be deposited in a cash savings account or invested in stocks and shares.
An estimated 6m children have the savings scheme.
But CTFs were scrapped in January 2011 and the junior Isa were introduced in the following November. This has a contribution limit of £3,600 in the 2012/13 tax year, rising to £3,720 in the 2013/14 tax year.
The amount that could be contributed by family members and friends to a child’s CTF was raised to match the annual junior Isa allowance, but the interest rates available on the older cash accounts started lagging behind those paid to junior cash Isa savers.
According to HMRC figures, 71,000 junior Isas have been opened since the scheme’s introduction. But the parents of children with money in CTFs have been precluded from transferring the money to a junior Isa so far. Children who have CTFs have also been prevented from opening junior Isas alongside their CTFs.
The 12 week consultation has been welcomed by the RBS Group. Martyn Jolly, Product Manager for cash Isas (standard version rather than junior), said: “This is a considerable step forward for children who have money tied up in CTFs as it means they will have a greater choice of accounts and are likely to earn more interest.”
Karen Gillie, Senior Fund Governance Manager, UK Retail, said that the maturity value of stocks and shares CTFs would be determined by a combination of factors, “but in the main fund performance and charges. Companies that offer lower charges, or even incentives to transfer, may not provide the best fund performance, and therefore the best value for their child at maturity”.
However she added: “What this change does offer to customers is a much greater choice, so they have the opportunity to invest their child's money into a fund that they believe better suits the needs of their child.”