Saving for Your Child's Future

On 5 April 2005, the Government began to hand out money to children when it officially launched the Child Fund Trust. The scheme, announced in the Chancellor’s 2003 Budget speech, makes a gift of £250 to every newborn baby for its parents to invest. (The amount is £500 in the case of low-income families). The Government will make a further contribution when the child is seven years old.

The scheme has been backdated to 1 September 2002, and children born between that day and the April launch date will receive slightly more than £250, to make up for the shorter time available in which to invest the cash.

The money cannot be spent and must be saved until the child is at least 18 years old. However, that money fully and properly invested to earn average interest (around 7%) will be worth only a couple of thousand pounds in 18 years’ time. That is not nearly enough to pay university fees, which are likely to be in the tens of thousands of pounds.

So, other savings opportunities ought to be considered by all parents, whether their children will be eligible for the Child Trust Fund or not. There are several choices.

Savings account

This is the simplest course of action. There are dozens available to children at banks and building societies, with most offering decent interest rates. The account can be in the name of your offspring as long as he or she is seven or older. Your child will usually be able to deposit cash, and in some cases make withdrawals.

Interest earned by a dedicated children’s account is tax-free, as long as the parents have completed an Inland Revenue IR85 form and the interest amounts to no more than £100 per tax year.

Friendly society savings schemes

Friendly societies are mutually owned organisations, like building societies. Among the financial services they offer are long-term, tax-free savings plans for children called ‘baby bonds’, which can be opened by an adult in their own name, or on behalf of anyone under 18. They have a maximum contribution limit of £25 a month, or £270 a year.

Saving in these schemes is a good idea if you are prepared to sit out the investment. If the product is surrendered early, you will face heavy penalties, and the returns will be tax-free only if you have held the plan for at least ten years.

The Association of Friendly Societies (http://www.afs.org.uk) can provide you with more details on starting an investment. Also see the UK Net Guide feature on friendly societies.

National Savings & Investments

This is the state-backed bank offering a range of schemes, including Children’s Bonus Bonds that pay a guaranteed rate, tax-free, over five years. They are sold in units of £25, with children being allowed to have up to £1,000 of a single issue of bonds.

The bonds are owned by your child, but are controlled by you until your offspring’s 16th birthday, and they can be held for longer, until a child’s 21st birthday.

Once each investment has reached its fifth anniversary, a bonus is added that can either be cashed in, or rolled over with a new tax-free rate. Another bonus will be earned if the investment is held for a further five years.

The National Savings & Investments website (http://www.nsandi.com) has more information on this and other investment opportunities.

Unit and investment trusts and ISAs

Your child cannot hold a unit or investment trust or an ISA until he or she is 18 years old. But you can start one on his or her behalf by opening an account and adding your child’s initials to the holder-name. When your youngster’s 18th birthday arrives, the assets will be transferred to the child – except in the case of an ISA, which cannot be transferred into a different name, meaning that you will have to continue holding it on behalf of your child.

There are hundreds of funds from which to choose. You should focus on potential returns and not be swayed by funds that have ‘child-friendly’ names (Rupert Children’s Fund, for example) or which offer gifts as lures.

A directory of investments, such as Funds Direct (http://www.fundsdirect.co.uk), is a good place to start. An independent financial adviser (IFA) will be qualified to offer you more specific advice. For more information, see UK Net Guide’s features on ISAs and finding the right IFA.

Taxation

Income from investments given by a parent to a child under 18 is taxed as the parent’s income each year, apart from the first £100. This rule is designed to stop parents using their children to avoid inheritance tax laws.

But both parents can give their child an investment, so the child can earn £200 in interest every year and not cost mum and dad a penny.