April 23 2014 Latest news:

With the imminent demise of child trust funds, parents are soon to be offered a new way of saving for their children.

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Parents disappointed at the abolition of child trust funds are likely to be happier following news that youngsters will be allowed to take advantage of tax-free Isas.

The government has said the idea behind the “junior Isa” was to offer a simple, tax-free way of saving money for their children, although final details on the accounts have yet to be firmed up.

While child trust funds (CTFs) also involved tax-free saving, they included contributions from the government, and so became one of the first things the coalition government axed as it attempted to slash the huge budget deficit.

The new junior Isas, on the other hand, will not involve any contributions from the taxpayer, but there will be restrictions in the same way there were with CTFs. There will be an annual cap on the amount parents can pay in; the money will be locked away until the child turns 18; and parents can opt to invest in the stock market or in cash.

The financial services industry had lobbied hard against the abolition of CTFs, so it came as no surprise when they welcomed the news about junior Isas.

“We were disappointed when CTFs were scrapped, so it is great to see a new scheme encouraging families to build a nest-egg for their children,” said Ipswich Building Society chief executive Paul Winter.

“These new accounts will help families save for their children’s future, whether they are looking to save for university fees, the deposit for a house or a first car.”

Gary Shaughnessy, of investment provider Fidelity, said: “This is a really positive move which endorses the idea of saving, particularly regular saving, from as early an age as possible. Isas are well understood and liked by savers – they work so it makes sense to build on them.

“Increasingly, we are seeing responsibility moving from the state and employers to individuals when it comes to saving, so a move towards whole-of-life saving – connecting children’s Isas, Isas and eventually pensions – must be our aim.”

Andrew Hagger, of Moneynet.co.uk, said: “It’s a sensible move to use the term ‘junior Isa’ as this will help educate children and I hope they’ll appreciate the benefits of tax-free saving and continue to make use of Isas as they move into adulthood.

“The devil will be in the detail, but I hope more providers will embrace the cash version of the junior Isa than just the dozen or so that offered the cash version of CTFs.”

Michelle Slade, an analyst at Moneyfacts.co.uk, said: “By the time children reach 18, they could end up with sizeable tax-free nest eggs, which they should be able to transfer to an adult Isa.”

CTFs were introduced by the previous government for children born after September 1, 2002.

Children received £250 vouchers from the government at birth, with those from less well-off families getting £500, while parents, friends and relatives were able to save up to £1,200 a year into the funds.

About 3.7 million accounts had been opened by parents by early 2010, according to the government.

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