The Junior ISA has had a slow start since it launched last November, with just 72,000 accounts opened, far lower than the 1.2 million the government had expected.
The product was launched last year as a replacement for the child trust fund (CTF) and was billed as a way to solve the savings crisis and help educate children about money.
Often called JISAs, they come in a tax-free cash version and a tax-efficient stocks and shares version similar to the adult ISA and are open to children that do not qualify for a CTF. This broadly means children that are born on or after 3 January 2011 and children under 18 born on or before 31 August 2002.
Six million children were eligible for JISAs when they launched on 1 November, and the government expected 20% of them - 1.2 million - to open an account.
Just 72,000 have been opened between 1 November and 5 April. As a comparison, in the first five months that the CTF was open almost 400,000 CTF vouchers were issued. A key difference between the JISA and the CTF is that there is no government contribution to the JISA, while the CTF attracted a voucher of up to £250 from the government.
Tony Gammon, director at Thesis Asset Management, says the "difficult economic climate where spare cash for investment is limited" has impacted the adoption of Junior ISAs.
He comments: "A contributing factor could be the volatility of stockmarkets and the continuing economic crisis in the eurozone, leading to a steady stream of bad news for investors, discouraging potential stocks and shares ISA holders. For parents, once they have made the decision to open the Junior ISA they are unable to retrieve the funds. There may be some mistrust or apprehension around what the child will do with the funds when they reach 18."
The maximum amount that can be paid into a JISA for the 2012/13 tax year is £3,600. This allowance will increase in line with Consumer Prices Index inflation from April next year.
At age 18, the JISA converts to an adult ISA and the child can cash in the money or continue to invest.
Danny Cox, head of advice at Hargreaves Lansdown, says new products always "take time to bed in" and the slow start may also be due to not all providers being ready to offer JISAs at launch.
Transfers between JISAs and CTFs are currently not allowed. However a number of firms including Hargreaves Lansdown and Saltydog Investor are campaigning for the ban to be lifted.
According to Cox, £300 per month saved into a JISA for 18 years might grow to £114,000 assuming a 6% annual investment return.
While parents or guardians have to open the JISA on behalf of their child, anyone can then contribute into the account. Gammon notes that most JISA accounts run by Thesis have been funded by grandparents rather than parents. "This could be a sign that the baby boomer generation is still better off than their children's," he says.
This article was taken from our sister website, Money Observer.