Parents miss out on benefits of saving for their children

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Millions of parents are being unfairly penalised by government rules barring them from its flagship child savings initiative, it has been claimed.

Fresh calls have been issued for the government to lift restrictions on its 
tax-free junior Isa (Jisa) product as new figures reveal alarmingly low take-up of the accounts.

Just 7 per cent of parents saving for children aged ten or under hold a Jisa, research out today shows, with many 
prevented from doing so because they have previously taken out a child trust fund (CTF).

Demands for the government to lift the bar on CTF holders opening a Jisa have so far fallen on deaf ears, leaving millions of people trapped in accounts now offering mediocre returns.

Jisas were launched in November 2011 to replace the recently abolished CTFs. Up to £3,600 can be saved into a Jisa tax-free each year, with parents given an option of a stocks and shares Jisa, a cash Jisa or a blend of the two.

Jisas don’t come with the government cash contribution that was provided on the opening of each CTF, nor can they be taken out by parents who had previously opened a CTF.

The latter factor means an estimated five million children born in the CTF qualifying period between 2002 and 2011 are unable to benefit from Jisas. And with CTFs no longer open to new money, parents and grandparents still saving into them have watched as the interest rates paid have plunged.

Of the 83 per cent of parents saving for children aged ten or under, nearly three- quarters have CTFs, even though they haven’t been available for two years.

Just 7 per cent hold a Jisa, however, according to the research today from Lloyds TSB.

It urged the government to “urgently review” the current policy for CTFs to allow parents to transfer the accounts to Jisas. The bank cited research showing that 53 per cent of parents feel the government is doing too little to help them save for their children.

Neil Lovatt, sales and marketing director at Scottish Friendly, hit out at the government’s refusal to back-track on what he described as “the ghettoisation of the Jisa into a middle-class tax break”.

“Just like the stocks and shares Isa allowance it’s becoming an account for the wealthy and well-advised,” said Lovatt.

“A move to integrate CTFs and Jisas would at least improve familiarity with the products and give the industry a chance of increasing the scope and coverage of an incredibly important tax break.”

Carl Melvin, director and chartered financial planner at Affluent Financial Planning in Paisley, said: “The perceived disadvantage would be removed if CTFs could be transferred and this would also remove the need for providers to have in place two infrastructure, delivery and management processes, saving costs which could be used to deliver better value to investors.”

The situation is made worse for 
parents in Scotland by the absence from bank branches north of the Border of the top-paying Jisa on the market. The 
Halifax Jisa has a rate of 6 per cent for 
parents who hold an adult cash Isa with the bank, but it isn’t available through Bank of Scotland, which offers a Jisa paying just 3 per cent.

Yet many parents are reluctant to use Jisas, said Melvin, as the money saved can go straight to the beneficiary when they turn 18.