Having children isn’t cheap these days, especially in the long term - the older they get, the more they cost. Higher education prices continue to soar and it’s almost impossible to get onto the housing market without having some capital or homeowner loans. All of these things may seem so far ahead, especially if your child is very young, but now’s the time to start saving to ensure you can provide what your children need further down the line.
Surveys suggest that we’re starting to realise this. A report published by Mintel in October 2005 found that 75% of British parents with children under 14 are now saving for their children’s futures. Nearly six million parents are now saving for their children, compared to just under five million in 2003. So it’s evident that we understand the need to save, but it’s not always easy to do so. The day-to-day family finances can be difficult enough to manage without having to think about the future. This article provides some information on how to save for children and explains some of the financial products available.
Bank accounts
The first step that most parents take towards saving for their children is to open a savings account on their behalf and start making cash deposits. Most banks and building societies have accounts specially tailored for children. They often have a higher rate of interest and offer incentives such as membership of a kids’ savings club with regular newsletters, piggy banks, toys and badges. Even if you’re not sure how often you’ll be able to make deposits into the account, it’s a good idea to set one up as soon as possible after your child is born so that it’s there whenever you do have money to put aside. Try to get into the habit of putting in at least a small amount on a regular basis - setting up an automatic transfer from your bank account will make this much easier. Alternatively, simply depositing the government child benefit on a weekly basis will get you off to a good start - it’s amazing how quickly it builds up.
Tax
Children are subject to income tax on bank accounts just like adults.
They receive a tax allowance and as long as their total income including interest doesn’t exceed this allowance in the financial year, they will not be taxed on their interest. (The allowance for 2006-2007 is £5,035.) However, this only applies when the savings are gifted by a relative or friend. Interest on money gifted by parents will be subject to tax if the amount of interest earned in a year exceeds £100 per parent. (This prevents parents from taking advantage of children’s accounts for their own savings.) If your child’s annual income will be less than their tax allowance and the money you give them in a year will amount to less than £100 in interest, you can fill out an R85 form from the Inland Revenue to apply to have the interest paid without tax being deducted. It may be worth opening separate bank accounts if your child will be receiving money from yourself as well as relatives or friends, to save any confusion.
Child trust funds
The introduction of child trust fund by the government in 2005 has made a big difference in helping parents to save for their children. In the scheme, new parents are given a minimum of £250 to invest in a long-term savings and investment account on their children’s behalf, plus a further £250 when the child turns seven. The proceeds are held in trust for them until their 18th birthday. It’s not subject to tax and up to £1,200 can be invested each year by parents, family or friends.
There are three types of account - a savings account, a shares account and a stakeholder account. The choice you make will depend to a great extent on your attitude towards risk. Savings accounts are the safest method as you won’t lose money this way, but the returns on the investment tend not to be very high.
The shares account invest your child’s money by purchasing stock market shares. Investing in shares can be risky, especially in the short term, although on the whole the stock market can produce a good long-term returns as share values tend to rise more than they fall over a long period. As saving for children is normally a long-term approach, shares accounts can be an attractive option. However, shares can go down as well as up at any time and past performance isn’t necessarily an indicator of future performance. It’s also important to note that the account provider will normally charge an annual fee for managing the shares.
The stakeholder account is a medium risk option, which invests in shares until the child turns 13 and then the money is transferred to lower risk investments and assets, helping to limit potential losses in the lead-up to the child’s 18th birthday. However, if the stock market performs well over this period, the returns won’t be as high as they would have been if the money had remained in the higher risk investments.
You’ll need to choose not only which account you want for your child, but also which provider. Various different banks, buildings societies and financial organisations provide approved child trust fund accounts.
The government simply sends you a voucher for £250, which you’ll invest in the account and provider of your choice. All providers are of course regulated and must meet the terms and conditions stipulated by the government. However, there may be differences in the products they offer. Look out for fees charged and any requirements relating to how much you deposit and how frequently.
Other government-backed savings options
The National Savings and Investments Bank (formerly the Post Office Bank) is an agency of the Chancellor of the Exchequer. It was set up in 1861 by the Palmerston Government to help working people save for their futures and as a means of raising government funds for public spending.
It offers various safe and secure options for saving. Premium Bonds, for example, are a monthly large-value prize draw in which you can enter anything from £100 to £30,000. The jackpot can be up to £1million, but prizes of between £50,000 and £100,000 can be won for every bond number held. The prizes are tax-free and bonds can be bought by parents, relatives or friends on behalf of children under 16. Alternatively, indexed linked savings certificates are a great method of tax-free saving in which the value of your money increases in line with inflation (linked to the Retail Prices Index) at guaranteed interest rates. Between £100 and £15,000 can be invested per issue, and they are available to anyone over the age of seven (or can be bought on a child’s behalf if they are under seven).
There are lots of other possibilities for saving for your children - investments, stocks and shares, bonds, savings accounts, trust funds - not all of which are specifically designed for children. In such cases, you’ll need to manage the money on the child’s behalf until they reach 18 (or sometimes 21). To find out how you can best provide for your child’s future, you should visit a financial advisor who will be able to outline the most suitable options for you and your family.
Benedict Rohan works as a freelance finance writer. Commercial Mortgage, Homeowner Loans, Remortgages
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