5.6 million youngsters could see the returns on their savings fall from later this year after the announcement that Child Trust Fund (CTF) holders will be banned from taking out the new Junior ISA. That’s the view of many financial experts who believe that savings returns on Child Trust Fund accounts will now be reduced in favour of the new Junior ISA savings accounts being launched this November.

Child Trust Fund holders cannot benefit from Junior ISA

Junior ISA savings accounts will come into force in November 2011 and will allow parents to save up to £3,000 per year for their child in a tax free account. However, the Government have confirmed that children who already have a Child Trust Fund account – any child born between September 1, 2002 and January 2, 2011 – will not be eligible for this new account.

Providers will concentrate focus on the best savings accounts

The Daily Mail recently reported that experts are concerned that interest rates on Child Trust Fund products will be reduced as providers compete to offer the best rates on these new savings accounts for children.

The newspaper also reports that there are just 23 Child Trust Fund investments to choose from today, compared to nearly double this amount when the CTF launched.

Savers are being urged to compare savings accounts for both Junior ISA savings accounts and Child Trust Funds in order that they ensure they are maximising the returns for their children. Experts are also calling for the Government to allow transfers from Child Trust Funds to Junior ISAs in order that all parents get to benefit from the very best savings rates.

However, the Government appears to have ruled out such transfers. A Treasury spokesman said: “While interest rates are a commercial matter for providers, we believe a sizeable and competitive CTF market will continue once Junior ISAs are introduced.”