Children's Savings Awards 2011
Everyone wants the best for their kids, and many parents will go to extraordinary lengths to give their children a good start. But certain things are out of reach unless your children and grandchildren have a decent nest egg behind them, particularly in these straitened times.
Indeed, saving for children has never been so important, which is why Moneywise runs its annual Children's Savings Awards to highlight the best places to stash your kids' cash.
The cost of bringing up children is phenomenal. Insurance company LV='s recent annual survey of the cost of bringing up kids to the age of 21 broke through the £200,000 barrier - a 4% increase on the previous year, and 43% up over the seven years since the survey was launched.
But how can you afford such an amount? The answer is not to desperately scrabble around to meet these costs from your income at the last minute, but to save regularly over the long term.
The range of products available for children was dealt a blow last year, when the government announced that it would no longer fund child trust funds.
While children will be allowed to keep pots built up in their name, and parents will still have an annual allowance of £1,200 to pay into existing accounts for tax-efficient growth, as of the end of December 2010 there is no more free cash to be had, and the CTFs will take no new savers.
On the upside, however, the government has decided to launch a junior individual savings account. These will become available from autumn 2011, and will be open to all children born since January 2011. The details have yet to be outlined, but they are expected to have similar annual limits to the CTF, and be able to hold cash or stocks and shares.
The main differences are that there will be no government contribution and they are unlikely to be opened for children automatically in the way CTFs were if parents failed to open an account within the first year of their child's life. So it will be up to parents to take the initiative.
Meanwhile, there are several other important vehicles for children's savings. The Moneywise Children's Savings Awards highlight the best-in-class for the various options. These are children's savings accounts; youth accounts; investment trust savings products; and stakeholder pensions.
Best Children's Savings Account
Winner: Chelsea Building Society Ready Steady Save
Current rate: 2%
Age range: Up to 15
Interest paid: Yearly
Maximum investment: £20,000
Contact: 0800 169 9911
Highly commended: Yorkshire Building Society One Day account
The market for children's savings accounts has struggled to deliver high rates at a time of historically low interest rates. However, in many instances, these have stood up better than their counterparts for adults, as financial institutions are keen to win customers at the beginning of their financial lives.
In identifying a winner, we avoided 'one-hit-wonder' accounts in favour of those that have delivered consistently for the past five years. It's perhaps not surprising, therefore, that the winner of this year's Best Children's Savings Account is the same as last year - Chelsea Building Society's Ready Steady Save.
Gavin Haynes, managing director of Whitechurch Securities, says: "This savings account provides a very competitive rate of interest, considering it offers instant access, so it makes sense for savers with a shorter time horizon."
But with its consistently competitive rate, it suits longer-terms savers too.
Nick McBreen, an adviser with Worldwide Financial Planning, adds: "In the current climate of lacklustre returns from cash deposit accounts, this is about as good as it gets. As Ready Steady Save is a postal or branch-run account, the young saver can be involved in making deposits and withdrawals."
Chelsea was bought by the Yorkshire Building Society in April last year, but the two share a similar outlook when it comes to children's savings and a similar commitment to competitive rates. This is clear from the fact that the runner-up in this category for this year is the Yorkshire Building Society One Day account.
The account is currently offering 1.75%, and has been a consistent top performer for the past five years. Haynes likes the ease of access, with unlimited withdrawals, plus the fact that the minimum deposit is just £10, which means even very modest savers can find a competitive home for their money.
Best Youth Savings Accounts
Winner: Yorkshire Building Society Freedom account
Current rate: 1.74%
Age range: 12-20
Interest paid: Half yearly
Maximum investment: n/a
Contact: 0845 1 200 100
Highly commended: Saffron Building Society V4 account
Youth accounts are similar to children's accounts, but are reserved for children from the age of around 10 to adulthood. The attraction lies in the fact these often come with a cash card and are branded more for teens, who will want to dip into their cash from time to time.
Typically, as there are fewer youth accounts on the market, the rates can be disappointing, but there remain some competitive deals, and rates have held up over this last year despite the record low base rate.
Again this year, the same two accounts stand out. Our winner is Yorkshire Building Society's Freedom account, which combines a good interest rate with a cash card, and also allows parents to restrict their kid's monthly withdrawals.
McBreen says: "The facility of withdrawals via a Link card will appeal to savvy youngsters who want to be able to get at some of their savings, though it might not be so welcome to parents trying to encourage a saving habit."
Our runner-up is Saffron Building Society's V4 account. It is currently offering a tiered interest rate, starting at just 1% for up to £10,000 and rising to 1.75% for £25,000 or more.
Haynes praises the higher rate for larger amounts, although McBreen points out that once savings have reached this level, it's worth considering alternatives to cash savings unless they will be needed in the immediate future.
Best Pension For Kids
Winner: Scottish Widows Stakeholder Pension
Number of funds within pension: 35
Restrictions: Can invest in maximum of 10 funds at a time
Charging structure: 1% a year
Contact: 0845 845 1004
Highly commended: Friends Provident
We have introduced a new category this year - Best Stakeholder Pension. It's an alternative for parents who have additional funds to stash away.
McBreen points out: "One of the unintended consequences of pension legislation and the introduction of stakeholder was that astute parents and grandparents spotted an opportunity to get HM Revenue & Customs (HMRC) to help fund long-term savings for children.
"Contributions up to £2,880 a year can be made for any UK resident aged three months or more into a stakeholder pension, and HMRC effectively adds in the tax relief component to bring it up to £3,600."
The first winner of this award is Scottish Widows' stakeholder pension. Advisers say they like the charging structure, with no initial charge and an annual management charge set at 1%.
Philip Pearson, a partner at P&P Invest, rates it for its choice of funds and the fact that up to 10 individual funds can be selected at any one time. John Kelly, an adviser with Chelsea Financial Services, particularly likes the fact that it allows you to hold up to 30% in externally managed Newton funds.
The runner-up is Friends Provident's Personal Range Individual Stakeholder Pension. McBreen likes this option. "With some 20 internal and 32 external funds with unlimited free switching and lifestyling options, this plan fits the bill for a simple and fair value stakeholder contract," he says.
Best Investment Trust Children's Savings Plan
Winner: F&C Children's Investment Plan
Fund management company: F&C
Number of investment trusts available through plan: 15
Min monthly contributions: £25
Min lump sum contributions: £100 (initial lump sum £250)
Initial charge: Nil
Contact: 0800 136 420
Highly commended: Baillie Gifford Children's Savings Plan
The awards in the final category focused on the best investment trust children's savings plans. These plans are attractive as they offer a low-cost, simple way to save regularly for children.
They won't appeal to everyone, however, because - unlike deposit accounts - they do come with higher risk. But the risk must be balanced against more potential return. If you're happy with that, there are some strong offerings.
The winner is F&C Children's Investment Plan, which offers 15 funds, the largest number in the sector. This is an accessible plan with low entry levels and reasonable charges for buying and selling trusts (0.2%), and the literature provided is clear and informative for first-time investors.
Pearson likes the clarity of the company website and the facility to invest online. McBreen agrees: "F&C does a good job online of highlighting the choices that parents need to make when setting up an investment for youngsters, with a clear explanation of the differences between designated accounts and the bare trust option."
The runner-up is Baillie Gifford's plan. It was particularly well-liked for offering access to Scottish Mortgage and Monks, both of which are global equity investment trusts and ideal core stockmarket holdings.
Haynes views Baillie Gifford as a reputable investment company and "a good all-round proposition".
However, Pearson adds: "The only drawback is that the fund choice is limited to eight investment trusts, all of which are wholly invested in equities, which restricts the ability to create a balanced portfolio across different asset classes."
For the children and youth savings account categories we examined Moneyfacts data for the past ﬁve years.
We filtered the results to remove any accounts where the small print required savers to jump through too many hoops in order to access a high rate. We then identified those accounts that delivered the most consistently high rates.
The best investment trust regular savings plan tailored for children and best stakeholder pension were judged by our panel of experts on the basis of minimum investment, fund choice and charges.
A feature of defined contribution pension funds. As people move closer to retirement, their tolerance to risk reduces. “Lifestyling” recognises this and provides an automatic switching facility from funds with higher volatility to ones with less volatility as retirement approaches. Generally this means the pension fund manager gradually moving a client from riskier assets such as shares into corporate bonds, gilts and cash as they near retirement.
A form of money purchase defined contribution pension launched by the then Labour government in April 2001 with low charges and no-frills minimum standards. Designed to appeal to people on low and middle incomes who wanted to save for retirement but for whom existing pension arrangements were either too expensive or unsuitable, the stakeholder didn’t really take off and looks to be superceded by the National Employee Savings Trust (NEST).
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.
An interchangeable term for shares (UK) or stocks (US). Holders of equity shares in a company are entitled to the earnings and assets of a company after all the prior charges and demands on the company’s capital (chiefly its debts and liabilities) have been settled. To have equity in any asset is to own a piece of it, so holders of shares in a company effectively own a piece proportionate to the number of shares they hold. (See also Shares).
Also referred to as the bank rate or the minimum lending rate, the Bank of England base rate is the lowest rate the Bank uses to discount bills of exchange. This affects consumers as it is used by mainstream lenders and banks as the basis for calculating interest rates on mortgages, loans and savings.
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.
Annual management charge
If you put money in an investment or pension fund, you’ll not only pay a fee when you initially invest (see Allocation Rate) but also a fee every year based on a percentage of the money the fund manages on your behalf. Known as the AMC, the actual percentage varies according to the particular fund, but the industry average for active managed funds is 1.5%.