Switch On To Saving This Summer

Get the lowdown on how to save for your kids.

This article was first sent to Fools as a 'Summer Lolly' email. 

Every summer, there is a period when newspapers struggle to find newsworthy stories to cover. Thus, they resort to publishing frivolous news stories with attention-grabbing headlines. Generally, this `silly season' lasts from mid- to late summer, when there are few sporting events to cover and Parliament is in recess. However, this year, instead of having a silly season, I'd urge you to have a `sensible summer' by saving more...

Start saving for a sensible summer

Alas, according to new research from Nationwide BS, three-quarters (74%) of adults think saving is important, but only half (50%) of us save regularly. However, as disposable incomes are under pressure from soaring food and fuel prices and higher mortgage rates, there's never been a better time to start saving for a rainy day.

What's more, thanks to the ongoing credit crunch, the savings market is highly competitive and attractive at the moment. For instance, it's possible to earn a table-topping 6.52% AER in a Best Buy easy-access savings account, as my Foolish chum Jane Baker revealed in Who Is Winning the Saving Rate War?

Begin when they're young

Today, I'm going to urge you to teach the savings habit to your children and junior relatives. The good news is that the government is keen to help, which is why it launched the Child Trust Fund (CTF) in April 2005. All children born after 31 August 2002 are automatically given a CTF, which is a kind of tax-free shelter for youngsters.

The government gets the ball rolling by contributing an initial £250 (£500 for low-income families), with an equal contribution on a child's seventh birthday. On top of this, parents, grandparents, other relatives and friends can contribute a total of £1,200 a year into a CTF. Over eighteen years, these contributions could amount to a handsome five-figure sum to help kick-start a young adult's life.

Contributions to a Child Trust Fund can be invested in cash, investment funds or directly into shares, as I explained in this article.

With a cash CTF, a child can earn high rates of interest on his/her nest egg. For example, rates paid by Best Buy cash CTFs range from 6.25% AER at Skipton BS to a seriously impressive 7.75% AER at Hanley Economic BS.

Alternatively, you could choose to invest in a shares CTF. After all, long-term, the stock market often provides better returns than savings accounts.

You can even invest in an ethical shares CTF if you wish.

What about kids who've lost out?

Alas, all children born before 1 September 2002 cannot have a Child Trust Fund. With around 700,000 children born in the UK each year, around 8.5 million youngsters do not qualify for a CTF. In other words, two out of three under-18s do not have a CTF.

Saving outside of a CFT

The good news is that most children will not have to pay tax on saving interest earned outside of a CTF. Indeed, a child can earn £100 of savings' interest on gifts from a parent without paying tax. Thus, with two parents, this tax-free allowance is doubled to £200.

Also, interest earned on gifts from other relatives and friends is assessed against the Personal Allowance for income tax, currently £6,305 in 2008/09. Thus, in most cases, children will not earn enough interest to breach these levels and are unlikely to pay tax on their non-parental savings.

Alternatively, you could opt for a children's savings account. As with all savings accounts, your goal should be to find the highest rate of interest possible. On the high street and online, one account stands head and shoulders over the rest. The Halifax Children's Regular Saver pays a fixed rate of 10% for one year on monthly contributions between £10 and £100. In effect, this is a one-year bond which pays a super-high rate of interest in return for twelve monthly contributions in a row.

Nothing comes close to this account, which is why both my son (7) and daughter (4) have one. Naturally, once twelve months have passed, I will start looking around for a replacement savings account. In the meantime, I'm delighted they are earning a double-digit return with no risk. That's sensible saving for you!

Get Free Advice On Shares Child Trust Funds Via Fool.co.uk