How to build your child's financial future
Savings and investments for children is big business, with building societies, banks and investment houses all looking to win their young customers for life.
But, whether you're thinking about an early years savings account or a pot to fund their further education, it's important to get as much as possible out of these first financial choices.
'Whatever their age, getting children used to the idea of saving their money and seeing it grow is an important part of their financial education,' says Andy Parsons, head of investment research at The Share Centre. 'With these basics mastered, it often makes for a better financial future.'
You can open a savings account for a child aged up to 18, and it's often worth going for the children's version as they generally pay higher interest rates.
For instance, according to Moneyfacts, a provider of personal finance data, the highest rate is 6 per cent on the Halifax's Kid's Regular Saver, followed by a handful of instant access accounts from Nationwide, HSBC, Lloyds and Halifax paying 3 per cent.
In comparison the best adult regular saver is 4 per cent from the Saffron Building Society or Reliance or, for an easy access account, 1.60 per cent from BM Savings.
As well as helping them learn about money management and secure a better interest rate, an account in their own name can also bring tax advantages.
Children have the same income tax allowance as adults - £10,000 in 2014/15 - and as few actually use this up, they'll enjoy tax-free interest. All you need to do is complete a form R85 (available from the bank or building society, or online) and interest will be paid gross.
Although tax is unlikely to be an issue for the child, parents do need to be careful not to fall foul of the £100 restriction. Under this rule, if the money given to a child by a parent earns more than £100 in interest or dividends, it will be taxed as the parent's.
It is well worth considering other options for longer-term savings and investments. Top of the list is the Junior Isa, or Jisa, and its forerunner the child trust fund, which was available to children born between 1 September 2002 and 2 January 2011.
These allow up to £4,000 a year to be saved for a child tax-free (2014/15), with the money locked away until age 18. There are two types available - a cash Jisa and a stocks and shares Jisa - and a child can have just one or split their annual allowance between the two each year.
stocks and shares
No tax is payable on interest or investment gains, and parents don't need to worry about busting the £100 rule with money they pay in.
Moreover, as Danny Cox, head of financial planning at Hargreaves Lansdown, explains: 'If you're going to be saving for at least five years, which is generally the case with a Jisa, stocks and shares will usually give you a better return than cash.'
This is demonstrated in research by Barclays - its 2014 Equity Gilt Study - which found that in 75 per cent of the five-year periods since 1899, stocks and shares outperformed savings. Extend the time period to 10 years and the percentage increases to 90 per cent and, by 18 years, there's a 99 per cent probability that stocks and shares will fare better than cash.
The other key advantage of Jisas is that the money is locked away until the child reaches 18, when it will become a standard adult Nisa, accessible by the child. This removes the temptation to dip into funds, enabling the pot to grow untouched during their childhood.
For some parents this can be a disadvantage, with the prospect of an 18-year-old being able to access their Jisa pot serving as a deterrent.
Jason Hollands, managing director at Tilney Bestinvest, says: 'If you're uncomfortable about the prospect of an 18-year-old receiving a potentially substantial pot of assets, it's worth bearing in mind that the adult Nisa has a £15,000 allowance. You could focus on building up your own Nisa, using the assets to settle costs on behalf of the child or giving them the money as and when you feel comfortable.'
take advantage of your own allowance
There's no tax disadvantage to using your own Nisa, but while you'll get the security of control you'll also miss out on your child's annual Jisa allowance. In fact, Cox says there's little evidence of spending splurges among its customers with maturing Jisas. 'The vast majority have stayed with us,' he says. 'There's no mad rush to spend. I do think children value this money and want to use it wisely.'
If you use up your child's Jisa allowance or want to do something extra, there's nothing to stop you setting up a bare trust to hold investments on behalf of a child. To do this, you'll need to complete a bare trust application form from the investment company, stating the child's name and appointing trustees - typically the parent or guardian.
The trustees are able to make decisions about how the money is distributed in the child's interests before they reach the age of 18 but, again, the fund automatically becomes the child's when they hit this milestone.
Another option is a designated account. This is even simpler, with the person setting up the account merely adding the child's name to the application form, to indicate the money is intended for them. However, there's no formal requirement for it to go to them - so you could hang on to the cash if needs be.
There are key tax differences to consider. Bare trusts are taxed in the child's name using their income tax allowance, although parents need to be aware of the £100 rule.
In contrast, with a designated account the (adult) account holder is liable for any tax and the assets will also remain part of their estate for inheritance tax purposes. Hollands believes this tax treatment means designated accounts have limited appeal.
While it's possible to build your own portfolio for a child, there are also investment products designed specifically for children. These include Invesco Perpetual Children's Fund and investment trust schemes such as Aberdeen's Investment Plan for Children, Baillie Gifford's Children's Savings Plan and Witan's Jump.
As Jemma Jackson, a spokesperson for the Association of Investment Companies, explains: 'Investment companies lend themselves to saving for children, spreading risk across a range of companies and allowing investors to make the most of the long-term potential of the stock market.'
But whether or not you go for a product labelled specifically for kids, be sure you study the investment basics first and do not be distracted by a cuddly toy or moneybox freebie.
Pensions savings attract tax relief and grow tax-free
There's nothing to stop you building a pension for kids while they're still in the playpen. You can invest up to £3,600 gross each tax year into a pension, with tax relief meaning it costs you just £2,880.
Simon Davis, director of wealth management at Charles Stanley, applauds the tax breaks. 'As well as tax relief on contributions, there's no liability to capital gains tax or any further income tax on dividends,' he explains. 'Over time, compounding will turn this money into a sizeable pot.'
For example, according to Hargreaves Lansdown, if you took advantage of the full £300 a month contribution from birth to age 18, your child's pension pot could be worth £579,000 by age 65 (assuming growth of 5 per cent a year and annual charges of 1 per cent). Even a gross contribution of £50 a month would create a fund worth £96,000 at age 65.
The potential downside is the length of the investment period, according to Davis. 'Under current rules a child wouldn't be able to access their pension until at least age 57,' he explains. 'But this could be an advantage too.'
Investment picks for a child's Jisa
It's possible to take a relatively high-risk approach when it comes to a child's investments. 'Many parents apply their own degree of risk to their child's Jisa, but they can afford to take more risk, as there could be as many as 18 years for their money to grow,' says Andy Parsons, head of investment research at The Share Centre.
This means that potentially more volatile but higher growth options such as emerging market and specialist funds can also be considered.
These are some of the investment options recommended by advisers.
Veritas Global Equity Income, Aberdeen World Equity.
CF Woodford UK Equity Income, Lindsell Train Global Equity.