Choosing for children
THERE has never been a more important time to plan for your child’s future. The global financial crisis has illustrated the dangers of becoming reliant on debt, so it is only sensible to get your offspring into the savings habit as early as possible.
The question is: where should they put their money?
Mark Dampier, head of research at Hargreaves Lansdown, says this depends on factors such as the child’s age, what they are likely to need the money for in the future and the family’s overall attitude towards risk.
“If the child is very young, putting the money into equity-based investments may be a sensible move,” says Dampier.
Andy Gadd, head of research at Lighthouse Group, believes parents should make the most of government incentives — and this means using the Child Trust Fund (CTF), a tax-free savings scheme introduced for those born on or after September 1, 2002.
“It is vital that parents make an active decision on the investment of the £250 voucher given to them for their children, otherwise Revenue & Customs will open a stakeholder account with a random provider once the voucher expires.”
In this case the child loses 12 months’ potential growth and the investment may be inappropriate.
“If parents are unsure what to do they can invest it with a CTF provider in a building society account while they decide.”
Children are given an initial £250 voucher and a second at the age of seven. Relatives and friends can top up these pots of cash to the tune of a total £1,200 every year.
Investing the annual maximum could result in a lump sum of more than £37,000 by the time the child reaches 18, according to The Children’s Mutual. Putting away £24 a month could provide just under £10,000.
Is this sensible? Although CTFs offer attractive tax breaks, it may be worth using different types of savings to protect them from unforeseen circumstances.
Despite current stock market problems, someone prepared to take an “average risk” and looking for capital growth for 10 to 15 years should consider an equity-based investment, insists Geoff Penrice at Bates Investment Services.
If your child receives a £500 windfall, where should it be invested to generate the best possible returns by the time they reach the age of 18?
We gave three scenarios to financial advisers Geoff Penrice at Bates, Andy Gadd at Lighthouse Group, and Andrew Merricks of Skerritt Consultants and asked them for their recommendations.
Scenario one: Move to top up the trust fund
A four-year-old with a Child Trust Fund and a high street bank account
Geoff Penrice: “I would consider using the stakeholder facility in their Child Trust Fund. A high proportion of CTFs have been invested in equity funds and I hope people have not been put off by recent problems with share prices falling because markets tend to become better value after they fall.”
Andy Gadd: “The child already has a CTF so, assuming the annual allowance of £1,200 has not been utilised, I would add the £500 to this account. These accounts are free from income and capital gains tax. In this respect they are, in effect, what may be termed an Isa for children.”
Andrew Merricks: “If it is possible to top up their existing, equity-based CTF, then do so. An investment of £500 is not that much, so you may as well have the compound growth working on a bigger chunk than having that growth diluted by investing in a separate vehicle. History shows that this is quite a good time to buy if you are taking a long-term view.”
Scenario two: Find a long-term plan
A six-year-old who did not qualify for a Child Trust Fund but has a bank account
Geoff Penrice: “I would consider phasing in to a unit trust during the next year, such as the Newton Balanced Fund. This can be put in a Bare Trust for the child’s benefit (so it would not be part of their parents’ estate when it comes to inheritance tax) by putting the child’s initials after the parents on the application form.”
Andy Gadd: “I recommend an equity-based investment which should be regularly reviewed. Diversification reduces risk and I suggest the Foreign & Colonial Investment Trust purchased through its Children’s Investment Plan.”
Andrew Merricks: “I would go for an equity investment such as the Newton Global Higher Income Fund. This would mean the investments are in stocks and shares worldwide that pay dividends. Over time — and as long as we get through the next couple of years — this should produce better returns than cash.”
Scenario three: Keep the risk to a minimum
A 13-year-old with a bank account
Geoff Penrice: “If the youngster needs the cash within five years, they should stay in deposit-based savings. If not, they could consider putting half into an equity-based fund and leave the remainder in the bank.”
Andy Gadd: “Equity-based investments can be considered but I would want to discuss the potential downsides of this with the parents to see if this is a risk they want to take. The child does not have a CTF, so the cash should be placed in a bare trust if equity-based, or a designated account if deposit-based.”
Andrew Merricks: “I would go for a corporate bond fund where the income is reinvested because they are offering equity-like returns with relatively low downside risk. The M&G Optimal Income it has a good manager and can invest in different areas of the fixed-income market.”
