BLOG: Celebrations for JISAs, but misery for child trust funds

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Written by:
01/11/2013
Darius McDermott on why child trust fund holders must be allowed to transfer to a Junior ISA (JISA) as soon as possible.
BLOG: Celebrations for JISAs, but misery for child trust funds

This Friday, 1st November, marks the second anniversary of the Junior ISA. Its first year was a slightly worrying time, and it looked like being a slow developer.

According to HMRC, in the first five months of the Junior ISA (1st November 2011 to 5th April 2012), there were 6 million children eligible for the product, but only 71,000 accounts were opened. Compared with their older sibling, the Child Trust Fund (CTF), this was a very poor start, but then there wasn’t the added incentive of free money from the government!

However, in its second year, as public awareness increased, the Junior ISA seems to have found its feet. In the last full tax year, 295,000 more accounts have been opened and, if you look a little more closely at the figures, there are some other encouraging signs.

While there may not have been the big initial take-up in terms of numbers, considerably more money has already been invested. HMRC statistics show that only 21% of CTFs have had further contributions added, and these additional contributions averaged just £314 per account. The average Junior ISA pot amongst our clients already stands at £3,655.

Parents and grandparents have also used the opportunity to put some money aside for older children who were not eligible for the CTF. 63% of Junior ISA accounts opened with us so far have been done so on behalf of children born before 1st September 2002. The amount invested has also been almost double that for newborn babies, possibly as investors realise that there is less time to save for these older children before they may need the money for university or other big ticket events in early adulthood.

So not such a bad start after all, especially when you consider the economic environment and the squeeze we’ve all had on household finances. The voucher from the government may have been an incentive to open a CTF account, but it doesn’t seem to have worked as an incentive to keep saving. The reasonably-priced Junior ISA, with better choice, is a far superior offering and holds much more appeal.

Which brings us to the point that CTF holders are now being disadvantaged. CTFs are now a zombie product – by 2028 the last child will turn 18 and CTFs will cease to exist.

Cash rates are lower than the equivalent offered for Junior ISAs, and there is little incentive for providers to improve on a product that is already more limited in choice, and generally more expensive, when it comes to the stocks and shares component.

Indeed, I believe more and more providers will exit the market as costs start to outweigh the money made from assets under management and costs will become prohibitive, just for providers to break-even. I don’t see why a child’s date of birth should stop them getting the best deals for their financial future – it seems incredibly unfair.

The government is aware of this plight and a consultation was undertaken this summer, discussing the possibility of either merging the CTF into Junior ISAs or at least allowing CTF holders to transfer to a Junior ISA if they wish.

We at Chelsea responded to this consultation, along with a number of our peers, and we hope that common sense will prevail and we will see a favourable outcome.

We believe having one simple product is the fairest and cleanest way of encouraging children’s savings for the long term and therefore in the best interests of our children, who will face ever increasing financial burdens in the future and would benefit from all the help we can give them from an early age.

The Chancellor’s Autumn Statement on 4th December would seem an ideal opportunity to give savers some good news for a change.

Darius McDermott is managing director of Chelsea Financial Services

 

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