Saving for your children’s future

Every resident person in the UK is entitled to receive a tax free income of £7,475 in the fiscal year 2011/12. And that includes children.

This means that any money invested for a child can earn interest at the gross rate rather than having standard rate tax at 20% deducted by the bank or building society. The process for ensuring this happens is straightforward and the parent or guardian need only complete a tax form R85 to ensure that the maximum interest is earned.

So children already have a head start over tax payers in that they will receive more income for every pound saved. Over time, interest will be earned on this extra amount of interest and the compounding effect means that a much higher sum will be available when the money is needed.

That means that parents or guardians can look for high interest accounts as a way of saving for the future. This may be to help towards further education costs or as a financial nest egg to help with the deposit on a home or the purchase of a major item such as a car. Putting aside a small amount each month from an early age can lead to the build up of a healthy pot when the child matures into an adult.

Until recently the government supported parental saving by providing each child with a £250 bond that had to be invested in a Child Trust Fund. Any family member or friend could top this up to a maximum of £1,200 per year meaning that it could be possible to have a pot of £38,000 or more when the child reached 18. Some parents will still have Child Trust Fund accounts even though the scheme has now bee scrapped for all but a minority of children.

There are other tax free ways to invest on behalf of a child. Index Linked Savings Certificates issued by the NS&I allow up to £15,000 to be invested for three to five years at rates that are guaranteed to stay ahead of inflation. There are penalties for early encashment so this is a home only for money that is not needed until the end of the term.

Premium Bonds used to be more attractive but over recent years there have been changes to the prize pool structure which has reduced the chances of winning. However, any prizes are tax free and there is a chance of the big £1m prize every month. No interest is paid on capital invested so this really is more of a speculative investment.

Even though children can earn their tax free limit before paying tax there are a range of Individual Savings Accounts (ISA`s) aimed specifically at this market. That means that where the annual income is likely to exceed the tax free earnings further can be shielded by investing in an ISA. Since children cannot invest in stocks and shares ISA`s until they reach 16 only half the full limit can be used and must be saved in cash schemes.

Many commercial banks and building societies recognise the importance of getting children to save by offering a range of attractive savings plans. Amongst these are (currently) a number of plans offering between 4.25% and 6% gross interest – much higher than adults can achieve. There are conditions and maximums that can be invested but by using a number of these plans quite a substantial portfolio can be held at inflation beating rates.

Educating children on matters financial is vital if they are to be successful in the challenging world of the future. The financial support that previous generations enjoyed will not be there for the future so encouraging saving and self sufficiency could open doors that may otherwise be closed. Whilst they may not be able to hold a Barclays credit card until they reach 21, building a financial nest egg may help they off to a good start to adult life.

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