Planning ahead for your child's future
Seeing your child grow up and leave home is hard enough for any parent. But with many young adults now struggling to find tens of thousands of pounds for university fees or for a deposit on a first home, it has become even harder.
So what can you do if you haven't got lots of spare cash to subsidise your little darlings? Start saving a little, and early is the answer. By saving, say, £30 or £50 a month from when your child is born, it's surprising how much you can build up.
But what is the best way to do it? You could of course open an ordinary bank account. If you had paid £50 a month into the average savings account over 18 years to the end of January 2009 (£10,800 in total), the amount would have grown to almost £13,000, according to figures from Morningstar.
That's a safe option, but if you like a better return on your money, it's worth considering investing instead, as over the longer term share-based investments regularly tend to outperform cash. And with a time period of 18 years, your investment will have time to recover from any down periods in the market.
Putting your child's money into an investment trust could be a good option. Data from the Association of Investment Companies shows that, if you had paid your monthly £50 into the average investment trust over the past 18 years, it would now be worth almost £17,500. And remember, that's average performance – if you had chosen your investment shrewdly, you could have done a whole lot better.
For example, investing £50 a month into RIT Capital Partners, a leading global growth trust, which took highly commended in this year's global growth category, would have produced an 18-year total of almost £40,000.
But why should you consider investment trusts when saving for children?
First, says Zac Ghadially, an adviser at Yellowtail Financial Planning, they generally have lower costs than unit trusts or open-ended investment companies, which can charge up to 5.5% in initial fees.
"There are no initial charges with investment trusts and the ongoing management charges tend to be lower too," he says. Annual management charges on nearly a third of popular trusts stand at less than 1% a year – markedly cheaper than most unit trusts.
"It's important to look at charges; over the very long term you need to keep costs really low or they will eat into total returns," adds Ghadially. You don't have to cough up a hefty amount for broker fees either, but you may have to pay an annual plan administration charge.
The best way to invest your child's money into an investment trust is through a regular savings plan. These enable you to save little and often, which for many parents is more manageable than a one-off lump sum; and you also avoid the risk of putting all your cash in just before a market crash.
In addition, you'll benefit from what's known as pound cost averaging. This means that you drip-feed a set amount of money in each month, so your cash buys more shares when the market is cheap and less when it's expensive, helping to smooth out any sharp swings in share prices.
So, assuming you like the sound of investment trusts for your child's nest-egg, where should you invest? Eight investment trust providers offer special children's savings schemes. Some let investors choose between a wide range of in-house trusts: Aberdeen's Investment Plan for Children, for instance, includes half a dozen Asian trusts among others.
"Look for a scheme where you can spread your money between several trusts investing in different areas," suggests Ghadially. Other trusts, such as Witan's Jump, are broad-based single-trust plans, but these tend to be among the lowest-cost trusts.
Children's plans differ from normal ones in that you can invest from as little as £25, as opposed to the more typical request of £50. Most also make no annual plan administration charge.
Rebecca Taylor, an independent financial adviser at Dunham Financial Services, recommends the Witan Jump plan as "a nicely diversified fund", suitable for parents who don't want to worry about their investment.
However, Mick Gilligan, head of research at stockbroker Killik & Co, believes that for such a long-term investment it's worth making your regular savings choice purely on the basis of real investment potential.
He invests for his own children in BlackRock New Energy, which focuses on alternative energy and new technologies, because "there's a good 20-year story there".
Whatever plan you favour, your children cannot legally hold shares until they are 18, so the account must be controlled by an adult. There are two ways of setting this up. You can open a designated account in your own name, followed by the child's initials to ring-fence it from your other accounts.
You have full control over and access to the money until your child is 18 (so you could use it, for example, for school expenses). And if you're not happy about handing it over at that point, you can keep it in your own name, but it will be taxed as your money.
Or you can use a 'bare trust', where the money is held in the child's name and you act as trustee. Legally, the money belongs to the child at the age of 18, and it's taxed as the child's, but in practice parents often continue to manage it beyond that age.
For children born since September 2002, returns can be improved by investing through a child trust fund (CTF). These tax-free wrappers were introduced by the government to encourage families to save for their children.
When the child is born, the government provides a £250 sweetener (or £500 if you're eligible for full Child Tax Credit), with another paid when the child turns seven.
Parents can use this use to open a CTF account – either a cash account or a stockmarket-based investment. Family and friends can then add up to £1,200 a year. The money will grow free of tax and beyond the reach of parents or child, until the child is 18.
Foreign & Colonial offers a CTF account through which you can invest into a range of 14 of F&C's UK and international trusts. The most popular is the flagship global growth trust, which holds more than 700 companies across 35 countries. Witan, meanwhile, has recently launched a CTF that gives access to its global growth trust run by specialist managers worldwide.
All investment returns are measured against a benchmark to represent “the market” and an investment that performs better than the benchmark is said to have outperformed the market. An active managed fund will seek to outperform a relevant index through superior selection of investments (unlike a tracker fund which can never outperform the market). Outperform is also an investment analyst’s recommendation, meaning that a specific share is expected to perform better than its peers in the market.
Investment trusts are companies that invest money in other companies and whose shares are listed on the London Stock Exchange. As with unit trusts, private investors buying shares in an investment trust are buying into a diversified portfolio of assets (to reduce risk), which is managed by a professional fund manager. Investment trusts differ from unit trusts in two important ways: they are listed on the stockmarket and so are owned by their shareholders and are closed-ended funds with a finite number of shares in issue. This means the share price of investment trusts might not reflect the true value of the assets in the company (known as the net asset value, or NAV) and if the NAV value of a share is £1 and the share price in the market is 90p, the trust is said to be running a discount of 10% to NAV. But this means the investor is paying 90p to gain exposure to £1 of assets. Investment trusts can also borrow money and use this money to buy investments. This is known as gearing and a geared trust is thought to be more of an investment risk than an ungeared one.
Child tax credit
A scheme started in 2003 that sought to replace a raft of other tax credits and benefits, the payout depends on the number of dependant children in a family, and its level of income. The amount of credit is reduced as income increases. It is payable to the main carer of a child, usually the mother, and is available whether or not the recipient is working.