Investing wisely for your child
While the child trust fund (CTF) dominates the children's investment market, it's far from the only way to build up a nest egg for a child. As well as a number of products aimed specifically at children, you can put money into anything from a fixed rate deposit account to a highly volatile emerging markets fund for their future.
And, although CTFs offer excellent tax breaks, there are reasons why you might look for other forms of investment for their money. For starters, not every child qualifies for a CTF. Only those born after 1 September 2002 will be able to save into one.
Likewise, even for those children who do qualify, you might want to spread their money across different savings and investment products. This will give you greater diversification in terms of the underlying investment as well as the access you and the child has over the money.
As well as giving you greater flexibility, some financial products can help your child learn about money. For example, a building society savings account can be used from an early age to help them get the savings habit, as well as learn about more complex concepts such as compound interest.
A savings account should form the basis of any child's financial planning. This can be a good home for any cheques they might receive for birthdays and Christmas and will help them to start building up their savings.
You can open an account for a child at any age, although you will be expected to manage their account until they reach seven.
The banks and building societies offer plenty of accounts specifically for children and rates can be extremely competitive. To find the most competitive accounts for you and your child, check out Moneywise's savings round-up.
As well as headline rate, you should also consider how easy it is to use. For example, if you want your child to pay regularly into their account you might want to look for the best rate available among your local branches. And keep an eye on the rate, or teach your child good financial habits and encourage them to do this. Rates can slide once the accounts have attracted enough customers, so you might need to consider switching.
As well as standard savings accounts, NS&I offers a range of deposit-based products worth looking at. One of these is the Children's Bonus Bond, which pays a fixed rate of interest for five years, followed by a guaranteed bonus. Returns are tax-free and allow you to save anything from £25 to £3000 in any issue.
You could also consider an index-linked savings certificate. You can invest anything from £100 to £15,000 in any issue. Providing you hold one for at least a year, it will earn interest at a set percentage above inflation.
If you fancy a bit more of a gamble, you could plump for premium bonds. With these, you don't earn any interest but you could win as much as £1 million in the monthly prize draw and you're guaranteed to get your money back. The minimum investment is £100 but you can put in as much as £30000.
Legally, a child can't invest in these until they're 18, but it is possible to hold them in a bare trust or a designated account so they are treated as the child's for tax purposes. The downside of this is that they automatically become the child's when they reach 18.
When it comes to picking the investment, Ben Yearsley, investment manager at independent advisers Hargreaves Lansdown, advises: "Invest for a child in exactly the same way you'd invest for yourself. If it's good enough for you, then it's good enough for the kids."
Yearsley adds that with an 18-year timeframe it's possible to take more risk and recommends looking at funds that invest in emerging markets such as China, India and Russia. "These areas are going to grow. Although it might be a bumpy ride when the markets fall, it could be worth putting more money in."
In particular, he recommends the First State Global Emerging Market Leaders and the Neptune Russia fund. "You could consider splitting your investment between two funds if this is too extreme. For example, half could go into a good UK fund, while the remainder could go into one of these spicier funds. But keep an eye on them as fortunes can change."
Investing in your own name
As well as all the products that you can save into in your child's name, there's nothing to stop you investing for your child in your own name. Although you won't get to use their tax allowances and it may be tempting to tap into their money, there are advantages of doing this.
Because the money is in your name, you'll have more control over it, so you can decide when - and how - it's spent. For example, rather than hand it over at 18, you might decide to use the money to pay for your child's accommodation through university.
Investing in your own name also means you can include your ISA allowances for your child's investments. As these are income and capital gains tax free, this will be the same as if you had invested in their name and took advantage of their tax allowance. Plus, you wouldn't run the risk of the £100 parental income tax rule.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.
A form of National Savings Certificate, premium bonds are effectively gilt-edged securities: you loan your money to the government and, in return, it pays you for the privilege with a guarantee it will return your capital at a specified date. Where premium bonds differ is that the interest payments (currently 1.5%) are pooled and paid out as prize money and you can get your cash back within a fortnight, with no risk. Launched by Chancellor of the Exchequer Harold Macmillan in his 1956 Budget, every single £1 unit has the same chance of winning and in May 2011, 1,772,482 winners (from a total draw of 42,539,589,993 eligible bond numbers) shared £53,174,500. The odds of winning are 24,000 to 1 and the maximum holding is £30,000 per person but it remains the only punt in which you can perpetually recycle your stake money.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
Generic, loosely-defined term for markets in a newly industrialised or Third World country that is in the process of moving from a closed economy to an open market economy while building accountability within the system. The World Bank recognises 28 countries as emerging markets, including Argentina, Brazil, China, Czech Republic, Egypt, India, Israel, Morocco, Russia and Venezuela. Because these countries carry additional political, economic and currency risks, investors in emerging markets should accept volatile returns. There is potential to make large profit at the risk of large losses.
Capital gains tax
If you buy an asset – shares, a second home, arts and antiques – and then sell it at a later date and make a profit, that profit could be subject to CGT. You don’t pay CGT on selling your main home (which is why MPs “flipped” theirs so regularly) or any securities sheltered in an ISA. Individuals get an annual CGT allowance (£10,600 in 2010/2011) but if you have substantial assets it’s worth paying an accountant to sort it for you.
This is effectively paying interest on interest. Interest is calculated not only on the initial sum borrowed (principal) or saved (see APR and AER) but also on the accumulated interest. The more frequently interest is added to the principal, the faster the principal grows and the higher the compound interest will be. Compound interest differs from “simple interest” in that simple interest is calculated solely as a percentage of the principal sum.
This is a mutual organisation owned by its members and not by shareholders. These societies offer a range of financial services but have historically concentrated on taking deposits from savers and lending the money to borrowers as mortgages, hence the name. In the mid-1990s many societies “demutualised” and became banks. One academic study (Heffernan, 2003) found demutualised societies’ pricing on deposits and mortgages was more favourable to shareholders than to customers, with the remaining mutual building societies offering consistently better rates. In 1900, there were 2,286 building societies in the UK; in 2011, there are just 51.