Parents whose children have money in a child trust fund (CTF) savings account have been urged to move their cash to a top-payer soon.

Otherwise, they risk their cash lumbering in an account with a miserly rate after the Government's decision today to close the scheme to new applicants later this year and scrap taxpayer-funded payments to kids (see the Child Trust Funds guide).

The fear for those with an account – which will be maintained along with its tax-free return on investments, even under the scheme's revamp – is providers will stop issuing top-paying deals as CTFs fall into obscurity.

If that happens and rates across the board drop, your money will be trapped in a miserly-paying account given it cannot be withdrawn from the CTF system until your child reaches adulthood.

Dan Plant, MoneySavingExpert.com money analyst, explains: "Now the Government has abandoned CTFs, the worry is banks and building societies will follow. Though there have always been risks to adding your own money, the free cash and interest you could earn was a real boon.

"As we saw with Tessa-only Isas (known as Toisas), once a product moves off the political agenda, providers have been known to ditch their top rates, leaving customers trapped in accounts paying rubbish interest, without the ability to move cash out of the CTF system."

Kevin Bray, from analyst firm Defaqto, agrees: "It is entirely possible providers will cease to offer competitive rates. Once an account becomes unavailable to new customers they tend to blur into the background.

"I don't think this will happen straight away but probably from next year-onwards."

Top child trust fund savings deals

Our top-pick savings account comes from Yorkshire Building Society which pays 3% interest, though this includes a bonus of 0.7 percentage points for one year.

To switch provider (though you can only move the cash to another CTF scheme), just sign up with the new bank or building society, which will then let your existing provider know.

If you prefer to invest the cash on the stock market or in funds, remember you may see large returns but you also risk the value of your cash falling. If so, you may want investment advice, though always consider the charges of getting professional help (read the Financial Advice guide).

How child trust funds work

A CTF is a savings vehicle for children where the returns are tax-free. The cash can only be accessed, and goes to the child, when they reach 18.

The scheme was set up as a home for the cash the Government gives to new-borns and seven-year-olds.

Parents currently get £250 to put in trust for their child in voucher form (£500 if household income is less than £16,040) on the day he or she is born, and again on their seventh birthday.

The money can either be placed in a CTF savings account, which is similar to a cash Isa as interest is not taxed; or, a CTF investment where any return is also tax-free.

Child trust fund payments scrapped

From 1 August, taxpayer-funded contributions at birth will fall to £50 (£100 for those on lower incomes) and those at age seven will end. From 1 January, all top-ups will stop.

You or your family can also add cash, up to £1,200 per account, per year.

CTF accounts will remain for existing account holders and will remain tax-free, it's just the Government will no longer make payments into them. You'll also be able to top them up yourself.

But once legislation is passed later this year, you will not be able to open a new CTF account, unless you already have a valid voucher.

Further reading/key links

Official announcement: CTFs axed
Get the best rate for your child's savings: Child Trust Funds
See what you're entitled to: Five-Minute Benefit Check
Claim free childcare cash: Tax Credits

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