Anger grows as young savers are barred from superior Junior Isas.
Pressure is growing on the Government to relax the Child Trust Fund rules in next month's Budget, allowing 6.2 million children to escape the "rip-off" investment charges and rock-bottom interest rates.
If parents could switch these funds into lower-charging Junior Isas this could boost the value of these plans by £26m, according to financial experts. What's more, it wouldn't cost the Government a penny.
There is almost universal agreement from the savings industry, the fund management industry and consumer bodies that action is needed to stop this generation of children, now aged between one and 10 years, becoming second-class savers.
This issue came to the fore again this week as F & C Investments, one of the larger CTF providers, bumped up charges on many of its Child Trust Funds.
These children's savings account were launched in 2005 (for children born after September 1 2002). They were superseded by Junior Isas (Jisas) in January 2011. Both allow parents to save up to £3,600 a year, tax free, into an investment or deposit account on behalf of their child although only CTFs came with a free £250 from the Government.
However, Jisas now pay higher interest rates on cash, and offer access to the full range of investment funds, many of which have far lower charges that those levied on CTFs. But those born in the "CTF years" cannot access these accounts.
There are concerns that other CTF providers will follow F & C's lead and increase charges on these closed accounts. F & C has imposed a £30-a-year fee on its "shareholder" account, which invests in one or more of F & C's investment trusts. This charge will reduce returns on 60,000 accounts.
This flat charge means that a CTF worth £2,000 will effectively pay a 1.5pc plan fee on top of the annual management charges levied by the underlying investment trust. The flagship Foreign & Colonial Investment Trust, for example, charges a 0.37pc fee, while both the F & C Global Smaller Companies trust, and the British Assets trust both have a 0.4pc annual charge.
This flat-rate charge will disproportionately hit those who have never added to the original £250 investment. Darius McDermott of Chelsea Financial Services explained: "It is disappointing to see F & C introduce this charge on what was one of the most competitively priced CTFs. Many of its trusts in particular the Global Smaller Companies have produced decent returns. But some of these returns will be eroded by this higher charge."
However, he cautioned parents from automatically switching out of these plans. "This money has to stay within a CTF until the child's 18th birthday. Parents can transfer it to another CTF, but given the relatively small number of providers, investors are going to find it difficult to get a better deal elsewhere."
Most parents do not hold a "shares" CTF, but are invested in a stakeholder account. Here the money is invested in an index-tracking fund, before automatically switching to bonds and cash as the child nears his or her 18th birthday.
According to HM Treasury almost eight out of 10 CTFs are in these stakeholder plans some £3.92bn. Most of these funds, though, charge 1.5pc. Jason Hollands of Bestinvest said: "This is an extremely high charge for what is essentially a passive fund. Parents could invest in similar funds, outside the CTF for far less. It is possible to buy an HSBC (LSE: HSBA.L - news) tracker through a Jisa for just 0.27pc."
But as most providers charge the maximum 1.5pc fee these children are essentially trapped and can't get a better deal elsewhere. Mr Hollands described it as a "zombie market". If parents were allowed to switch these stakeholders into a low-cost tracker within a Jisa, this could boost the value of their savings by £26m.
There is a similar discrimination when it comes to cash CTFs and Jisas. The Nationwide pays just 1.1pc on its CTF account (falling to just 0.1pc if parents don't pay £240 a year into the account). In contrast its Jisa pays 3.25pc. Halifax even offers a Jisa paying 6pc although to get this rate parents have to open a cash Isa themselves with the bank, which pays a far less competitive rate. It is of course impossible to find returns anywhere near this in the CTF market.
Sylvia Waycot of the financial analysts Moneyfacts said: "Everyone except the Government seems to be in agreement that you should be able to move from a CTF to a Junior Isa. It simply doesn't make sense that parents should teach their children the saving habit by having money stuck in an account that is limited in provider choice and limited in account options. It is especially disappointing when the range of shiny new Junior Isas is growing, while the number of CTFs dwindles."
As she pointed out, it is this generation of children that have to face higher education costs, increased taxation and difficulties getting on the housing ladder, so government policy should be making it as easy as possible for them to save to meet these challenge, not putting barriers in the way.
A spokesman for HM Treasury said: "We appreciate there is interest in transferring Child Trust Funds into Junior Isas, and we continue to keep this under review." Chris Bowden and his wife, Joan, make a monthly contribution into their grandson Tristan's Child Trust Fund, which invests in two F & C trusts. He has been pleased with the performance to date, but is concerned that he does not have a wide investment choice. "Over the years I've benefited from making regular contributions into an investment plan. I would like to do the same for my grandson, but the choice is far more limited." He has written to his local MP asking for the rules to be changed. "We are expecting another grandchild in June who'll be eligible for a Junior Isa. It seems unfair that there will be such a disparity in the investment opportunities for our two grandchildren."
= Where should I put my CTF? =
You might not be able to switch your Child Trust Fund to a Junior Isa, yet, but this doesn't mean you should leave your child's nest egg languishing in an underperforming or overcharging fund. We look at what the best options are:
Cash: The big boys like Nationwide might pay 1.1pc but it is still possible to switch and get 3pc plus. Consider transferring to the Furness Building Society, paying 3.05pc. Alternatively, the Yorkshire BS is paying 3pc, and the Earl Shilton is paying 2.85pc. All accept transfers in from other CTFs.
Shares: Despite the price rise, F & C still offers some of the most competitively priced "active" shareholder accounts. Remember, these are mainly suited to those making additional contributions. Jason Hollands of Bestinvest said: "Charges are important but you want to make sure you are in a fund which has a good track record of delivering returns, and is appropriate to your level of risk."