Saving For Children

If you're 0- to 18-years-old, or you are parents of children these ages, here's how to get started financially now so that it's a lot easier later. (If you're 0 and reading this...well done.)

I read a press release from The Children's Mutual over the weekend. As you'd expect it was so boring, but there was one sentence that inspired me to write about children's savings and investments.

It said `Families who can save £100 a month over 18 years into a Child Trust Fund could see their child benefiting from £37,000 when they reach 18.'

If you or your parents are lucky enough to be able to save or invest £100 a month then The Children's Mutual's figures aren't outrageous. After 18 years and an investment of £21,600, you'd get £37k if your return was on average about 5.5% per year.

Of course, things'll cost more in 18 years, because prices usually rise. Even so, that pot should be able to help you or your child through higher education and to buy a car, and still have enough left for the beginnings of a deposit on a house or to go on holiday (whichever is most likely).

Saving in a Child Trust Fund (CTF)

5.5% is not a massive return. It's possible you'll be able to achieve that without risking the money in investments. Consider how low interest rates are at present, and yet I still find that the highest-paying Child Trust Fund offers as much as 5.5% AER fixed for one year. (Tax-free, as it's a CTF). The provider is Hanley Economic Building Society. I doubt the rate will be available to newcomers much longer, nor will Hanley maintain the rate for existing customers in a year's time.

Friends and relatives can contribute too, although the most that can go into a CTF in a year is £1,200. Children are allowed just one Child Trust Fund, but you can move the money between different ones to chase the best rates.

ISAs for 16-year-olds

If you're born before 1 September 2002 then you're not eligible for a CTF. If you're 16 then you can open your own cash ISA. However, the best at present falls quite short of our arbitrary 5.5% target: it's Birmingham Midshires Postal ISA, paying 3.5% fixed for one year.

Parents can save in ISAs for their children, too

Parents who don't save much for themselves each year could open ISAs in their own names to save for their children instead, although the top rate available of 3.5% is a problem for you as well. In this case, you'll need to be wary of inheritance tax if you gift the whole lot as cash and die within seven years of doing so. Paying directly for the child's education fees and buying the car might be smarter.

Parents could contribute a little more during the years when they can't make 5.5%. Children could offer to do extra things for parents in return for money that could be added to the pot.

Get an early boost with a regular savings account

Another option is to open a regular savings account. The Halifax Children's Regular Saver paying an excellent 8% AER fixed for a year. The rate will evaporate in a year's time.

You'll probably pay no tax on this account this year. Each parent (or step-parent) can contribute to taxable savings accounts (i.e. not CTFs or ISAs) in their children's names. For each parent, the child can earn £100 per year without any interest charges.

If the child earns more than £100 interest from each parent in a year then the parents will be charged interest at their top rates of tax on the whole lot. (£99 interest is earned = no tax. £101 interest is earned = £20.20 or £40.40 tax depending on the parent's income.) It'd probably be two years or longer before any tax is charged on your savings if just one parent contributes to a savings account, longer if two split the contributions.

If a non-parent or step-parent (i.e. another relative or a friend) contribute to a taxable account, it works differently. It's better if they open a separate account to make it easier to follow. The £100 rule doesn't apply here.

Instead, if such a person contributes, all the interest the child earns on all his/her taxable savings is added up. (Again, this excludes CTFs and ISAs, as they are not taxable.) If the interest comes to more than the Personal Allowance, which from April will be £6,475pa, then the child is taxed on the excess. Children have Personal Allowances, too.

Fixed or variable rate accounts for lump sums

There are, at present, no decent fixed-rate or variable-rate savings accounts for children into which you can put lump sums. None are managing better than about 3.5% AER. If this is still the case in a year, you're going to struggle to maintain the rate at or above 5.5% AER that you were receiving with Hanleys or Halifax.

You're probably going to have to search hard if you want to try to maintain this savings rate over 18 years, even if interest rates start to rise next year. But 5.5% isn't a magic number. Why struggle to reach it with savings when you have a high chance of beating it with shares?

Investing

If there are ten years or more till the 18^th birthday, the best returns will probably be in the stock market. Yes, the past ten years have been pretty rubbish for shares, but we've found that they've beaten interest earned from savings 90% of the time over ten-year periods. (Note, that's still 10% of the time where it doesn't work.) However, over 18-year periods shares have beaten cash 97% of the time!

Admittedly, that's the past and the future could be different, but with the stock market now so low and filled with many bargains, the future is looking good for young children with money. That's where I'd be putting it.

Here are some good places to start reading about investing for children:
Make The Most Of Child Trust Vouchers
My Son The Millionaire
ISAs And Investment Funds - The Basics

All product data in this article from data provider Moneyfacts. I looked elsewhere too, but was unable on this occasion to find anything better.

> Compare savings accounts and cash ISAs.