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Guide to Children’s Savings

How to invest

If your child is young and you are planning on saving at least until his or her university age, it makes sense to place the majority of your savings into share-based products.

Although shares are relatively volatile investments, over a 15- or 20-year time horizon they tend to outperform cash savings accounts.

Even so, a few years before the money is needed, make sure you transfer back a proportion of your funds into less risky products, to safeguard what has been built up already.

If you are saving in an ISA, don't keep all your eggs in one basket. Invest in a new provider or a new fund every year to reduce investment risk. Note that this is not possible with a Child Trust Fund-style investment.

Also, make sure that a proportion of funds remains in a low-risk environment, so that there is always some protection against risk. And keep some money available for emergencies, or even for school trips.

Savings products

There are many different schemes you can use to save, ranging from risk-free to very volatile. Choosing between them is a personal decision, based on your attitude to risk.
Here are some of the options available:

• Bank and building society savings accounts. There are more than 100 available for children, most offering a combination of decent interest rates plus various additional benefits aimed at engaging with your child

The account may be in your child’s name and he or she can deposit money – and in some cases take it out. If the child is under 7, the parent will have to open the account in an adult's name.

• National Savings & Investments: this state-backed savings bank offers a range of schemes, including five-year Children’s Bonus Bonds, which pay a guaranteed rate, free of tax, plus a bonus

You can invest up to £3,000 in each issue per child, with issues being launched each year on average, or when interest rates change. At the fifth anniversary, you can roll over the bond or cash it in

The bond is owned by the child, but controlled by the parents until age 16. Bonds can be cashed in without notice. Bonds can be held until a child reaches 21, with the last date for investment being just before a child reaches 16.

• Friendly society savings schemes: these are mutually-owned organisations with a history stretching back hundreds of years in some cases. They are allowed to offer long-term tax-free savings schemes or bonds, up to a maximum contribution limit of £25 a month or £270 a year. The money usually goes into “with-profits” funds, which invest in a combination of shares, bonds and property

Saving in these schemes can be a good idea if you are prepared to sit out an investment. But they can have high charges and heavy penalties if the product is surrendered early. So you should bear this in mind before you start.

• Unit and investment trusts and ISAs: here, the choice is virtually limitless. There are upwards of 2,000 funds to choose from

Children are unable to invest in a unit and investment trusts or tax-free ISAs until they reach 18, so while a fund may be designated with a child’s initials, it will still remain in the child's name. When the child reaches 18, an ISA cannot simply be transferred into their name, sadly.

Kids doing it for themselves

What if children want to save on their own behalf?

Here are some things to look for:

1) The interest rate paid. That said, while always important, it may not be THE most significant aspect. This is because unlike adults, children have less access to the internet or phone. Also, the amount they are likely to save is unlikely to benefit from that extra 0.5 or even 1 per cent per cent from the best account.

2) Access to the account (local branch or post), without penalty. It has to be local, within walking or bus-catching distance.

3) Incentives to save. This can range from free magazines and piggy-banks to videos and CDs, club membership and even signed pictures of the local football team’s top striker. You have to accept that this may well be the dominant influence in a child's decision to open an account with a provider.

If so, it becomes an issue only if you are combining what you save on their behalf with what they save for themselves. In this respect, it may make sense to keep two separate sets of funds/accounts, a long-term one into which the bulk of the money is paid, the other as the one that is controlled by the child.

In some cases, a percentage deal may work, or whatever the child saves is topped up by parental contributions. This is up for negotiation.

Any other wheezes?

Parents can save up to £3,600 a year into a stakeholder pension scheme on behalf of their children. With appropriate tax breaks, this becomes £2,808 after tax relief.

Setting aside the maximum amount for the first five years of a child’s life would build up a pot of more than £295,000 by the age of 55, the first point at which it becomes accessible (under soon-to-be introduced), assuming growth of 6 per cent.

Even taking inflation of 3 per cent into account, it could still deliver a pension of around £7,000 a year at today's annuity rates.

More pages

Page 1: Introduction
Page 2: How to invest

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