How you can build a nest egg for your child

Q: I'd like to build up some savings for my three-year-old daughter for when she turns 21.

I have an initial £1,000 lump sum, which I can follow with monthly contributions of £350, and possibly further lump sums. 

What are the best options for tax-free investing? I was considering a FTSE tracker fund. I'd also like the investment to be in her name, if possible.

A: Patrick Connolly is a certified financial planner for AWD Chase de Vere.

With high inflation and historically low interest rates, you need to consider an alternative to a deposit account. You can best achieve long-term saving through collective funds, such as unit trusts, OEICs or investment trusts, where investors pool their capital together within a professionally managed single fund.

For very modest levels of saving, a single fund is appropriate, but for the size of monthly contribution you're considering I advise a blend of funds, in order to create diversification and a balanced portfolio. 


The first option would be to maximise the funding into your daughter's child trust fund (which is no longer available to new babies), as you can invest up to £1,200 into it each year. The CTF is also tax-free so there's no income tax deducted from interest or dividends, nor any capital gains tax liability when money is withdrawn.

However, the savings will be available to your daughter once she reaches 18. Although there's no requirement for her to encash the plan then, she'll have full access to the capital.


If you feel that your daughter should be denied access to her savings until she reaches 21, you need to think about an alternative approach. You could consider setting up a trust. This should be drafted by a solicitor. 

A trust will lay out clearly who the beneficiary is and at what age they'll be entitled to the trust fund.

A minimum of two trustees are required - these are normally the parents. The trustees oversee the investments and contributions into the trust, giving them full control over it.

Again, you can use collective funds, as these can be held within the trust until your daughter is 21. 

To avoid incurring any trustee taxation, the investments can be assigned to your daughter's ownership upon her reaching 21. After that, any encashment can be managed against her capital gains tax allowance, which will provide tax-free returns. 

To start with, I recommend the Fidelity Moneybuilder funds, as they provide good value. There's no initial charge and they give sufficient choice to enable you to create a balanced portfolio.

Moneybuilder Balanced invests between fixed-interest and UK shares, while Moneybuilder Global provides exposure to international stockmarkets. Together they provide a good compromise between risk and return over the medium to long term.