Children's Savings

 

A question we are often asked, especially by members who are not in contact, is how they can put away some money for their children or grandchildren, sometimes to counter the accusation that "Daddy does not provide for you" made even when you do not know where the children are.

We have set out a few of the options available below as a helpful guide, should you need advice you should contact a Financial Adviser.

 

Child Trust Fund

For children born after 1st September 2002, the government will provide a one off £250 voucher shortly after the first Child Benefit payment. Children from low income families that get Child Tax Credits will get a £500 voucher. You can contribute to the account (up to £1,200 per year) but the money cannot be accessed by anyone until the childs 18th birthday. More details at www.childtrustfund.gov.uk

 

Savings Accounts

Most banks and building societies run children's accounts, which can often be set up for as little as £1, examples being:

 

Nationwide Smart 2 Save

Children aged seven and older can open an account in their own name; parents can do the paperwork for younger children. You should always apply to the bank or building society for a Form R85 to have the interest paid gross. Any interest above £100 a year will be taxed as the parent's own. This rule does not apply to friends and relatives.

 

Friendly Societies

A number of Friendly Societies target their savings schemes at babies and young children. They are tax free, but the maximum contribution is low. You can invest between £10 and 325 a month, or pay an annual sum of £270. There are other restrictions, you must keep the money in the scheme for at least 10 years or pay a penalty. There is also a monthly fee, which can rise with inflation.

These accounts may be tax free, but you'll probably end up paying more in costs than you would have in tax.

 

Investment Accounts

The Post Office runs savings schemes for people of any age. You can deposit sums of £20 and interest is paid before tax. A month's notice is required for withdrawals. The rates are low considering there is no instant access.

 

Children's Bonus Bonds

These tax-free bonds are run by National Savings and last for five years but you have to lock your money away for the full term to receives the top rates. Anybody over 16 can buy a bond for somebody under £16. You can invest between £25 and £1,000 for a child in each issue.

The bonds offer a tax-free investment and parents do not have to notify the Inland Revenue, but only £1,000 can be invested in each issue and the interest rate will drop sharply if the bond is not held for the full five-year term. The adult investor controls the bonds until the child reaches 16, when the child can cash them in or hold them until the age of 21, after which no interest is paid.

The rates are quite low and young investors would probably be better off with a savings account.

 

Capital Bonds

Anybody over seven can buy these National Savings Bonds and adults can buy them for children under seven. They are five-year fixed-rate investments on which interest is added annually and paid at the end of the term. You get the guaranteed rate only if you hold the bonds for the full term. Interest is paid without tax deducted, saving the burden of filling in an R85 Form, but parents investing on a child's behalf should be aware that the £100 rule still applies.

These are not the most attractive investments and better rates can be found elsewhere.

 

Unit Trusts

Shares may be riskier than cash or bonds, but they can often produce a higher return. There are several funds aimed at younger investors and they allow small, irregular payments but, as the charges are high, and performance sometimes low, it can make more sense to invest in a standard unit trust. Henderson's Witan Jump Investment Trust is probably one of the best of the bunch, with an initial fee of 1.5% and annual charges of just 0.2%. It has grown 50% over the last five years (as at 24 Feb 2002).

 

Stakeholder Pensions

You do not have to be 18 and working to set up a stakeholder pension. A parent or grandparent can invest up to £2,808 a year on behalf of a child. The government will then top up the contribution to £3,600 with basic-rate tax relief. The minimum monthly contribution is only £20 and charges are capped at 1% a year. Some people contribute their child benefit towards the Stakeholder Pension.

 

Premium Bonds

Also available from National Savings, the minimum purchase is £100 and you will be put in a monthly draw with a chance to win a variety of prizes from £50 to £1 million.

 

Updated 8 March, 2005