The government will launch a 'Junior Isa' for children next autumn to help fill the gap left by Child Trust Funds (CTF).
All returns on the Junior ISA will be tax free but unlike CTFs there will be no government contributions.
Investments will be available in cash or stocks and shares and funds placed in the account will be owned by the child.
Annual contributions will be capped and the money will be locked in until the child reaches adulthood.
The government will now work with stakeholders to finalise the structure of the accounts, which it plans to have up and running by autumn 2011.
Financial secretary to the Treasury, Mark Hoban, says: "The introduction of this new account means we can still offer people a clear way of saving for their children, while saving the half billion pounds a year we currently spend on CTFs."
The coalition government announced in May it would stop all payments to CTFs by January.
Payments under the scheme were sharply reduced from August in the build-up to its full withdrawal.
At present, parents of newborns receive a minimum £250 voucher to invest for their children. They can have access to the money from the age of 18.
The Tax Incentivised Savings Association (TISA) welcomed the move.
Carol Knight, head of member services, says: "Many parents even now are making financial sacrifices to help children through university or onto the housing ladder so this new savings scheme will play an essential role by providing a vehicle which the public feels comfortable with and will help families make provision for the future."
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