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Feathering the Nest - investments for kids
from 0-18
Alison Steed, Deputy Personal Finance Editor
at The Daily Telegraph, unravels the myriad of choices for investing for
children in the run-up to the release of the Government’s Child
Trust Fund voucher.
Illustrations by Emily Faccini
Child Trust Fund Vouchers
Vouchers
for the Government’s Child Trust Fund (CTF) should already be dropping
onto your doormat if you have a qualifying child but you should not wait
for a reminder before saving for your children.
All children born on or after 1 September 2002 are eligible for at least £250 from the Government at birth, rising to £500 for low income families.
The vouchers, issued from January onwards by the Inland Revenue, must be used to open a qualifying account with a provider. A list of both providers and distributors will be given to you by the Revenue to help you make your choice.
Justin Modray of independent financial adviser (IFA) Bestinvest, says: "CTFs will offer a straightforward and tax-efficient route to saving for children."
The Government's standard £250 or £500 contributions at birth,
and an as yet undisclosed amount at age 7, may be topped up by an annual
contribution of up to £1,200. However, other than friendly societies,
there has been little commitment from the investment industry to offering
CTFs, so it remains to be seen how much choice and access to quality
investments will be on offer. It is well worth getting your relatives
to add to the fund too, if they can, to make the most of the allowances.
Savings accounts
Of course, as there is a cut-off date for children to qualify for the
CTF vouchers, there will be many families who have children that do not
benefit from the Government’s largesse. But there are plenty of
options to save for them too, so they do not feel left out.
Mr Modray says: "In general terms, investing for children is no different to investing for adults. You need to establish objectives and then choose appropriate investments from those available in the marketplace. With the exception of bank and building society accounts, and CTFs, I would normally ignore investments specifically marketed at children as they are often mediocre investments wrapped in fancy 'child friendly' packaging.
"Typically, parents and grandparents wish to save for their children and grandchildren on a regular basis, either through a yearly lump sum or a monthly saving until the child is 18 or older."
Many deposit accounts are designed for children’s savings, and often they offer decent rates of interest. For example, Philip Pearson of IFA P&P Invest in Southampton, says:
"Accounts worth considering for regular saving are the Scarborough Building Society Children’s Savings Bond, requiring a minimum monthly commitment of £5. The account runs for three years, currently offering an interest rate of 5.75%. Alternatively, the Halifax Monthly Saver, again available from £5 per month, provides 5.55%.
"Modest saving by means of a lump sum for a child again should be directed to a deposit account.”
The Saffron Walden Building Society offers a Ladybird account providing 5.35% interest for a minimum deposit of £1.
"If the child is aged 16 then a cash individual savings account (Isa) can be established. The Lambeth Building Society provides such an account offering 5.65% interest from a minimum deposit of only £1."
As each of us has an annual personal tax-free allowance, including children, which this year is £4,745, children’s accounts should be tax free. But you will need to fill in a form R85 to ensure that the tax is not deducted at source by the provider. If you have failed to do this for a number of years, you can fill in a form R40 to reclaim tax from previous years.
Another thing to remember about interest and tax is that if you put money
into an account as a parent, and the interest earned as a result is more
than £100, that interest is taxed at the parent's normal rate. This
rate applies to both parents, so if the money is given
equally, the limit would be £200, says Anna Bowes of IFA Chase de
Vere.
One exception to this rule is the Children’s Bonus Bond offered by National Savings & Investments. Mr Modray says: "National Savings offers a five-year fixed rate 'Children's Bonus Bonds'. However the current rate of 4% a year is not particularly competitive. They are tax-free, although limited to £3,000 per issue."
Investment funds
Of course, if you are planning not to allow your child to touch the money
until age 18, you may want to consider a stockmarket-based investment,
which should produce better returns over the long-term. These come in
a number of forms 
but
the two basic ones are unit trusts and investment trusts. Both are "pooled"
funds, where a number of investors’ money is pooled together to
buy a broad range of underlying shares, which reduces the risk you take.
They are governed by different regulations and unit trust are less risky
than investment trusts.
Mr Pearson says: "To own such a fund you need to be aged at least 18. Therefore, parents and grandparents would normally establish a plan in their name, designated for the child. When the child reaches 18 they will become the rightful owner of the investment. Until then the guardian or parent will control the investment.
"This type of saving is very tax efficient in that the plan will grow tax free and any gains made in the years to come can be offset against the child’s Capital Gains Tax allowance, currently set at £8,200 for this financial year."
There are plenty of investment funds marketed specifically towards children but you should not be seduced by the marketing.
Mr Modray says: "Some funds, such the Invesco Perpetual Children's Fund, which used to be called 'Rupert Bear', are conventional unit trusts packaged specifically at children but always look beneath the gloss to establish the merits of the underlying investment. In the case of this Invesco Perpetual fund, performance has been indifferent.
“Another factor to bear in mind is asset allocation. It does not generally pay to put all of your eggs in one basket so, over time, it makes sense to get exposure to a range of economies and fund managers. You will also need to check minimum investment levels, as many funds have minimums of £50 or more a month and £1,000 as a lump sum."
It is possible to buy unit trusts through what is called a fund supermarket,
which offers flexibility and can be very cost-effective. There are a number
of these available, such as Fundsnetwork, and many IFAs provide these
services, such as Hargreaves Lansdown
in Bristol.
Mr Pearson says: "There are also a number of investment trusts, again aimed at children. Generally, these types of fund have lower initial charges than unit trusts. However, there are additional costs such as Stamp Duty that need to be considered when purchasing shares within a trust.
"Investment trusts also tend to have minimum charges applied for investment. Regular saving of modest amounts can therefore work out rather expensive. So investment trusts should only be considered for substantial investment."
There are exceptions though. Mr Modray says: "Baillie Gifford's
children's savings plan levies no initial or annual charges for the plan.
Investors simply pay the underlying investment trust annual charges. But
there is a charge of £20 to make an encashment."
For unit trust investment, Mr Modray recommends the Fidelity Moneybuilder
Global and Artemis Global Growth as options, "although the £50
a month minimum investments might be a little steep for some".
He adds: "Those wanting a lower monthly minimum might consider the Edinburgh Worldwide Investment Trust via the Baillie Gifford Children's Savings Scheme, which has a good global spread with a minimum of just £30 a month."
Ms Bowes recommends the Fidelity Wealthbuilder unit trust. She says:
"It is invested 100% in equities, with roughly 45% in the UK and
55% split between other countries.
"This fund can form a great core holding for almost any portfolio
as it can take advantage of investment opportunities around the world,
whilst providing huge diversification. It’s a good one to invest
and leave, although it’s always wise to review your investments
on a regular basis."
She also recommends the Invesco Perpetual Income Fund, which has a minimum
investment of £20 a month. As an alternative, she plumps for the
Gartmore Cautious Managed Fund.
First published in angels & urchins, Spring 2005