Time to free the savings of 6.3 million children

They all face losing £34,000 interest before they’re 18

TODaY Money Mail calls on the Government to rescue the savings of 6.3 million children whose cash is locked up in child trust funds.

More than £4.3 billion is trapped in these accounts and some parents have paid in thousands of pounds based on a promise they would provide ideal long-term investments for their child.

But child trust funds were scrapped in 2011 and youngsters are being deprived of some of the best savings deals and cheapest investments.

This is because government rules prevent them moving their cash into better-paying Junior Isas.

and today we can reveal child trust fund savers face a second blow — they face losing all the valuable tax breaks they have built up over 18 years.

The Labour government had promised families would be able to move their child’s trust funds into an Isa when they reached 18. But Money Mail can reveal no such rules were ever drawn up. Instead child trust fund savers will have to withdraw all their cash.

as part of our campaign to Get Britain Saving, Money Mail is calling on the Treasury to save the financial futures of these 6.3 million children. We want it to stick to a promise made in July 2011 to review the way child trust funds and Junior Isas work.

We believe child trust fund savers should be allowed to transfer their money into Junior Isas. and a number of heavyweight firms agree with us.

These include Lloyds TSB, halifax, hSBC, Nationwide building society, Skipton building society, and investment firms Fidelity, Invesco Perpetual, Jupiter and M&G.

Child trust funds were an expensive bribe dreamed up by the last government. Babies born between September 1, 2002, and January 2, 2011, were given £250 to put in child trust funds.

Some families also got a further £250 top-up on the child’s seventh birthday. at 16 the child can look after the money, and withdraw it only at 18. all profit and interest is paid tax-free.

But after the credit crunch, the funds became an expensive gift that the country could no longer afford.

They were scrapped and replaced with Junior Isas. These work in much the same way as child trust funds.

Families can save up to £3,600 a year into both — only there is no initial gift from the Government with a Junior Isa. and any child with a trust fund is barred from opening a Junior Isa — which means that they miss out on the best deals. Since trust funds have been scrapped, the choice of funds and savings on offer is limited. The organisations offering the best rates, such as hanley economic Building Society, which pays 5 pc, Britannia and Cambridge BS, have banned transfers in. a child who qualifies for a Junior Isa can earn 3.25 pc with Nationwide BS savings account. But a sibling stuck in a trust fund earns as little as 1.1 pc. at Skipton BS, Junior Isa savers get 3.06 pc, but only 2.56 pc in a trust fund. The best Junior Isa savings rate is 6 pc with halifax for parents who have their own cash Isa with the bank. For a trust fund, it’s 2.56 pc at Skipton.

This means if parents saved the full £3,600 allowance every year for 18 years, the child with the Junior Isa would be £34,000 better off. Saving £100 a month, they would be £11,228 worse off in a trust fund.

More than one in ten firms who offered trust funds 12 months ago have pulled out. On the high Street, six out of ten providers have stopped.

One of the largest trust fund providers, The Children’s Mutual, is looking to transfer its 900,000 accounts to Forester Life.

Junior Isa savers get a choice of 1,800 funds from 80 fund management companies. But there is only a handful of funds that child trust fund savers can pick. This fierce competition in Junior Isas means charges are low, at around 0.5 pc.

In a child trust fund, they can be as high as 1.5 pc, even on a basic stock-market tracker.

Figures calculated by Fidelity show this would strip £11,474 from the savings of the trust fund saver compared to the Junior Isa on the full £3,600 invested each year at 6 pc growth.

another crucial difference is that when they hit 18, Junior Isa savers will be allowed to move their money into an adult Isa.

This means that they can keep all the years of tax breaks they have built up.

But in a child trust fund, the tax breaks are lost, because all the money has to be cashed in, leaving the saver to start from scratch.

a spokesman for the Treasury confirmed that child trust funds could not currently be transferred into an adult Isa when the account holder reached 18.