Child trust funds (CTFs) have been a popular vehicle since their launch in 2005, with over 6 million accounts opened by parents in the UK, who want to build up a tax-free nest egg for their kids to access at 18 to fund a surer start to adult life.
Budget cuts in 2011 scrapped the 'top-ups' from government and, while existing CTFs can still be topped, up they are closed to younger children who can access Junior Isas (Jisas) instead.
From 6 April, parents were given the freedom to move their existing CTFs to a Jisa provider if they so choose, but what are the differences, and how do people decide if moving is the best thing for their child's tax-free savings?
Since the launch of CTFs, most savers chose the CTF 'stakeholder' account, which offered government-endorsed clarity and protections around charges (capped at 1.50 per cent all-in) and how the investments were managed. Stakeholder CTFs had 'lifestyling' built-in to reduce investment risk on approach to the 18th birthday, when funds were expected to be withdrawn.
This is important because as the child approaches their 18th birthday and their pot is more valuable from contributions and investment growth, any sudden downswings in value will create permanent damage to their portfolio just when they want to withdraw.
This 'shortfall risk' could jeopardise their spending plans they were counting on: whether for higher education, or skills training, or to start a new savings journey.
Junior Isas offer more choice of investments and the fees associated can be chosen based on provider and investment cost, which makes Jisas seem more attractive to those that want choice.
But there is no 'stakeholder' Jisa that offers the same protections or risk managements and parents migrating CTFs to Junior Isas may not be aware of the loss of these protections. It is a question for parents to ask themselves: are they happy to forego the risk management offered by CTFs, in favour of greater investment choice and flexibility on fees?
Interestingly, parents who want to make active choices about managing their child's investments, are in a minority: only 22 per cent of accounts are actively managed, typically by more confident parents. The vast majority - 78 per cent or 4.7 million - of the 6 million CTF accounts are in stakeholder strategies.
These customers put trust in the government's stakeholder rules to help assure they get the outcome they expect. In this respect the absence of a Stakeholder Jisa alongside the 'unrestricted' Jisa seems odd.
SO WHAT SHOULD STAKEHOLDER JISAS LOOK LIKE?
A Stakeholder Jisa would, like CTFs, have a cap on total all-in costs of investments and of account administration to ensure consumers are protected and comparisons against CTFs can be made.
A Stakeholder Jisa would, like CTFs, incorporate similar protections by using the same rules around lifestyling as CTFs have. Or the lifestyling can be provided using target date funds where the target date is set a child's 18th birthday.
Managed CTFs are doing a great job for those that have them, and managed Jisas will replace this. But for parents who don't have the time, interest or confidence to manage their child's investments, and for CTF Stakeholder customers who want to switch without loss of protections, there needs to be a Stakeholder Jisa alternative.
With a Stakeholder Jisa the popular CTF-style protections are available for the many that expect them, without compromising the additional choice available for the few that want it.
Gallia Grimston is director of BirthStar® Target Date Funds.