Invest in Your Child's Future

Uphill all the way, with plenty of scope for a serious fall: starting adult life from a financial viewpoint can be likened to scaling a mountain. So when it’s time for your child to turn 18, wouldn’t it be great to give them enough cash to establish a solid base and help them take that mighty step upwards towards independence.

OK, how can I plan for my child’s financial future? Savings Accounts: The most secure and simple way to invest is to open a straightforward savings account. Expect the return on the investment to be steady. For example, £500 with a 5% annual growth would become £1,000 in 18 years, whilst £500 with an annual growth of 9% would become £1,970 in the same period. As interest rates are set to continue increasing, this may prove a beneficial option. However, although the money earns interest it might not grow to such a peak as if it were invested in shares over the long term. And although savings accounts are low risk, the money may be reduced by inflation.

Premium Bonds (National Savings & Investments)
A child can own between £100 and £30,000 worth of Premium Bonds. What’s the attraction of this? Well, each bond is entered into a prize draw every month for a chance to win tax free cash prizes. And the down-side? Interest is not paid on Premium Bonds. For more details go to www.nsandi.com.

Children’s Bonus Bonds (NS&I)
Children’s Bonus Bonds provide tax-free interest for children under 16, with an additional bonus if the money remains untouched for five years.

Accounts that Invest in Shares:
This option allows your child’s money to buy shares in companies. Of course, when a company does well, the shares mount in value, yet there is a high risk that the shares could tumble into a crevasse. This type of account has good potential when money is invested for a long time, usually at least ten years. Risks are reduced if you look into owning a selection of different shares in established businesses, so it may be easier and worth paying for professional advice from a financial advisor.

Stakeholder Accounts:
In order to reduce risk, you could plump for stakeholder accounts. These enable you to invest your child’s money in shares spread across a number of companies. Stakeholder Funds should be ‘lifestyled’. This means that once your child reaches 13, money in the account should be moved to less risky investments, such as bonds and cash.

Do children have to pay tax on savings?
Like adults, children have a personal tax allowance of £5,225 for the tax year 2007-2008. This is income that they can receive tax-free.

The Child Trust Fund
Children born after 1 September 2002 have much to celebrate. If invested wisely, the generous £250 awarded for them by the Government may build into a very pro table nest egg to use when they reach the magic age of 18. It is the parents’ job to make sure that this money, otherwise known as the Child Trust Fund, is wisely invested. But, short of peering into the Chancellor Alistair Darling’s crystal ball, where do we start?

Facts about the Child Trust Fund

A voucher to the value of £250 is given to parents of every child born after 1 September 2002. It is to be invested in an account for that child.

Children from families in receipt of Child Tax Credit (with a household income less than £14,495) will also receive an extra payment.

The money must be placed in a long-term savings and investment account.

The Child Trust Fund is flexible. Parents can choose the type of account they want for their child and where they want the money invested. Throughout the duration, the account can be moved to an alternative provider.

No-one, except your child when he or she turns 18, can withdraw the money.

All income and interest gained in the account is totally tax-free.

Each year, parents, family or friends can also invest up to £1,200 in the child’s trust fund.

Around the time of your child’s seventh birthday, the Government will put into your child’s trust fund a further payment of £250. Youngsters from lower income families will receive an additional £250.

For more information go to: www.childtrustfund.gov.uk

More about money
For general information about choosing an account, you can also check the Financial Services Authority website: www.fsa.gov.uk. Teaching a Child to Save (to be placed in a separate box) It is important to influence early on our children’s attitude towards money. This way, they learn its value, and they build healthy spending habits. Leading by example will help. Demonstrate wise spending when you visit the shops with your child. Explain how money can be saved in a variety of ways such as two-for-one offers, shopping when
a Sale is on and highlighting the importance of shopping around. You can also help prevent your child falling into the traps of habitual impulse spending by not giving any ‘top ups’ when cash runs short. It is possible to wait until the following week’s allowance comes in! On the subject of weekly allowance, encourage your youngster to save a portion of his allowance to pay for a much-wanted item that he couldn’t otherwise afford. By putting coins into a clear bottle or jar, your child will be able to visualise progress. And when children get old enough, let them open their own passbook savings account to help them learn to understand how a bank system operates.

Kirsty Woodgate