THOUSANDS of Scottish families are set to remain stranded in moribund child trust funds (CTFs) despite new rules allowing transfers to more generous alternatives.
Experts warn that a failure to raise awareness of legislation taking effect next month enabling switches from uncompetitive CTFs into junior isas (Jisas) means many parents will miss out on the opportunity to bolster their child’s nest egg.
There are around 6.3 million CTFs in which families have saved or invested more than £8 billion – and much of that money looks set to stay there despite the disintegration of the market.
The announcement in December’s Autumn Statement that parents, grandparents and other CTF account holders will, from 6 April, be allowed to transfer to Jisas represented a U-turn for the government. Previously it had ignored repeated calls to help savers stranded in CTFs get a better deal.
Jisas became available in November 2011, giving families a new tax-free way of saving for their children after CTFs were removed from sale in 2010.
Up to £4,000 can be saved through a Jisa into cash, stocks and shares or a combination of the two, rising to £4,080 from 6 April.
But, until next month, millions of children born between 2002 and 2011 and who have CTFs in their name are frozen out of the Jisa market. Instead they have been left in a CTF market in which providers have slashed the rates on cash-based accounts to levels well below those available on Jisas.
The best Jisa cash returns are offered by the Coventry and Nationwide building societies, which each pay 3.25 per cent (although holders of Halifax cash Isas have access to a Jisa paying 4 per cent).
In contrast, the best CTF offer (from Yorkshire Building Society) is just 3 per cent, while the average cash CTF pays 2.04 per cent and some as little as 1.1 per cent, said Andrew Hagger, personal finance expert at Moneycomms.co.uk
“The CTF market has become stagnant, with no competition or enhancements to products – moving to a Jisa gives greater choice and access to higher interest rates for cash based products,” he said.
The savings gained in switching from a cash CTF to a cash Jisa could be significant. Someone with a £1,400 balance and saving £340 a month (the maximum under a £4,080 annual limit) for the next 12 years into a Jisa at 3.25 per cent would end up with £61,820 – £4,590 more than a CTF at the average rate of 2.04 per cent and £7,880 more than a CTF at 1.1 per cent.
The situation is little better for those with stocks and shares CTFs. The choice of investment funds has dwindled since CTFs were taken off the shelves, whereas many Jisas provide access to more than 2,000 funds, investment trusts and other eligible vehicles.
Sara Wilson, head of proposition at Alliance Trust, said: “There are three key reasons to move to a Junior Isa from a CTF: CTFs don’t tend to be administered online, they are predominantly cash with historically low interest rates, and they offer a limited investment choice.”
Many CTF holders are unaware that an escape route will soon be available, however. Almost six in ten parents with children aged between four and 13 (and therefore in the CTF catchment range) don’t know that it’ll soon be possible to transfer CTFs to a Jisa, according to research by Scottish Friendly.
Calum Bennie, savings expert at Scottish Friendly, said: “There is a very real danger that if more isn’t done to let people know about the change in rules, parents may just end up leaving their money in a CTF where interest rates can be as little as 1.05 per cent.
“It took a considerable amount of persuading the government to make these changes, so it’s important these hard won gains aren’t forgotten about.”
The problem is compounded by the fact that switches to a Jisa will be voluntary and therefore rely on parents being aware of the new legislation. Many campaigners had called for CTFs to be merged automatically into Jisas.
Parents with CTFs can open a Jisa already, but they can’t make any contributions until the new tax year. Those taking advantage of the new rules should first choose the provider they would like to switch to and then ask that company for a transfer form.
There are no exit fees on either cash CTFs or stakeholder stocks and shares CTFs, but some non-stakeholder accounts may levy fees.
Austerity policy ‘is hitting poorest in Scotland the hardest’
People in Scotland’s poorest communities are suffering disproportionately from the consequences of the coalition government’s austerity policies, in-depth new research has confirmed.
Low-income Scots are feeling less financially secure as a result of welfare reforms and government spending cuts, according to a study for the Joseph Rowntree Foundation by researchers at Glasgow Caledonian University
The report, which focused on the impact on older people, lone parents and people suffering in-work poverty in North Lanarkshire, found an “unprecedented transfer of risk from the state to individuals”. Cuts to services such as educational support and social care will ultimately backfire by driving costs even higher, it said.
Lone parents have been hit particularly hard by tougher sanctions relating to jobseeker’s allowance and the reclassification from carer to employee when seeking work. The report’s authors call on the Scottish Government to devote more resources to identifying the social risk implications of austerity.
Professor Darinka Asenova, lead investigator on the study, said: “All levels of government need to begin analysing the cumulative impact of this risk transfer and if necessary introduce policies to lessen the adverse impacts on the most vulnerable.”