Introducing Junior ISAs, the Replacement for UK’s Child Trust Fund

Last week the United Kingdom’s Treasury released details on Junior Individual Savings Accounts (ISAs), which are designed to replace the Child Trust Fund (CTF). The CTF, which was in operation from 2005 to 2010, provided universal savings accounts to all newborns in the U.K. with progressive contributions for eligible account holders. Their replacement, Junior ISAs, will retain little of these same features when they become available on November 1, 2011, calling into question whether their features will benefit children from low-income backgrounds.

Like the CTF, Junior ISAs are rooted in the larger Child Development Account (CDA) policy recommendations that aim to help children, especially those from low-income backgrounds, gain access to mainstream financial institutions early in life and begin saving for future expenses like college. Common features of CDAs include universal participation (meaning that everyone gets an account), automatic enrollment at birth with an initial deposit, progressive contributions for children from low-income backgrounds, restricted access until age 18, and tax-free withdraws for purposes like education, retirement, or homeownership. The accounts also pair access with information by providing financial education so that children develop the knowledge needed to manage their accounts. These features – especially universal participation, automatic enrollment, and progressive contributions – are considered the staples of CDAs. In other words, supporters believe that these features are the keys to extending access to and improving the educational and financial outcomes for children, particularly those from low-income backgrounds.

Junior ISAs are a scaled-down version of CDAs, offering none of these key features. This scaled-down version, which is likely the result of political compromise, is less than palatable for those who adhere to the common CDA features. (Notably, there is growing research support for these features including automatic enrollment and progressive contributions. For more information, see publications available from the Center for Social Development). Of particular concern is whether children from low-income backgrounds will participate in Junior ISAs and whether accounts will serve as tax shelters for wealthier families, concerns expressed by those in the Asset Building Program at New America and others.

While a CDA policy has not come to fruition in the United States, legislation has been proposed into Congress. The America Saving for Personal Investment, Retirement, and Education (ASPIRE) Act, most recently introduced into Congress in 2009 and 2010, would create Lifetime Savings Accounts (LSAs). Contrary to Junior ISAs in the U.K., LSAs would offer key features including universal participation, automatic enrollment, and progressive contributions. However, the ASPIRE Act has been proposed into Congress regularly since 2004 without surviving the legislative process to become public law, leaving open to question whether CDA policy in the U.S. might experience a fate similar to the CTF: yielding to political compromise and offering a scaled-down version of policy recommendations.

Click on the picture of the table for a comparison of features between Lifetime Savings Accounts (LSAs) in the U.S. with the CTF and Junior ISAs in the U.K.