Moneywise Children's Savings Awards 2012
Bringing up a child entails a huge financial obligation. The cost of everything from baby clothes and nappies in earlier years to toys, holidays and, for some, school fees in later years can be daunting for parents.
By the time your child has stopped giving you hugs and banned you from their bedroom, you'll have done well just to keep up with the basic cost of raising them, let alone save enough to help them go to university, buy their first home or travel.
For many parents, saving for their child's future seems like a whimsical wish rather than a concrete objective. However, saving even a small amount each month can build an impressive pot by the time your babe in arms reaches adulthood.
One advantage of saving for children is that time is on your side and while the child trust fund is no more, at least for new account holders, several long-term options are available.
BEST CHILDREN'S SAVINGS ACCOUNT
Winner: Chelsea Building Society Ready Steady Save
Current rate: 2%
Age range: Up to 15
Interest paid: Annually
Maximum investment: £20,000
Contact: 0845 166 9219
Highly commended: Norwich & Peterborough Building Society's Family Young Saver
As well as the newly introduced Junior ISAs (JISAs), parents can use savings accounts, investment trusts and even pensions to save for their children. We reveal the best providers in our annual awards.
The most straightforward way to start saving for your child is with a children's savings account. But whereas just five years ago it was possible to find accounts paying 6%, the best children's savings account now pay a third of that.
This year's winner, Chelsea Building Society's Ready Steady Save account, currently pays 2% interest. The rate alone doesn't sound that enticing but the consistency and flexibility of this account has earned it top spot. The account, which also won the same award last year, has paid 2% interest since the summer of 2009. It can be opened with a balance of just £1, allows instant access and can be operated via the post or through a branch. Another big bonus with the account is that withdrawals can be made without loss of interest.
Nick McBreen, wealth adviser for Worldwide Financial Planning, sums the account up well when he says: "This is a pretty flexible account for the under-15s and pays a competitive rate of interest."
Runner-up in this category is Norwich & Peterborough's Family Saver. It pays 1.75% on balances, again starting from £1, and allows instant access without penalty. Peter Chadborn, director at independent financial adviser Plan Money, says the account will "appeal to all young savers because it offers online access".
Some other accounts pay higher initial rates of interest but we exclude these from consideration for the award if their rates suddenly drop. For example, while Bath Building Society's Futurebuilder account initially pays 5% on the first £500, the rate falls to 1.1% for amounts above that.
Adult easy-access savings accounts also pay slightly higher interest rates but these are more liable to change than children's account rates. Chelsea's Ready Steady Save has been paying the same rate for more than two years.
BEST TEENAGER/YOUTH ACCOUNT (FROM AGE 11 UPWARDS)
Winner: Yorkshire Building Society Freedom
Current rate: 1.74%
Age range: From 12 to 20
Interest paid: Twice a year
Contact: 0845 120 0100
Highly commended: Saffron Building Society V4
As children get older, why not give them the opportunity to save for themselves? Of course, the disadvantage of this is they may fritter a substantial amount of their money away before they start to learn the lessons of saving. However, this year's winning youth account from Yorkshire Building Society gives children a cash card but it also allows parents to have a hand in proceedings.
Darius McDermott, managing director at Chelsea Financial Services, says: "Parents or guardians can set a monthly withdrawal limit for under 18s [the account is available for 12 to 20-year-olds]. This means they won't squander the lot while they are still learning how to manage their savings independently and budget their expenditure."
McBreen agrees this feature "may help create a saving mindset in the account holder rather than a ‘spend-now' approach". The 1.75% gross interest is paid twice a year and the minimum starting deposit is just £10.
Our runner-up in this category, Saffron Building Society's V4 account, pays 1% interest, although this increases to 1.75% if savers save a big enough pot. "Saffron's account has tiered interest rates, depending on how much is held in the account: 1% for £10,000 or less, 1.35% above this and 1.75% at £25,000," says McDermott.
At first glance, Santander's youth account, paying 2.96%, appears a lot more attractive. However, this rate only applies to regular monthly payments and balances of up to £500. It drops to 0.1% on any balances above that.
If a child's parent or guardian has a current account with Santander, the rate rises to 4.89%. But this rate only applies to the first £500. "If you have more to put aside, a lower rate on the whole amount may be better," says McDermott.
REGULAR SAVINGS PLAN
BEST INVESTMENT SAVINGS PLAN
Winner: Aberdeen Investment Plan for Children
Number of investment trusts available through plan: 16
Minimum monthly payment: £30
Minimum lump sum: £150
Initial fee: none
Contact: 0500 000 040
Highly commended: F&C Children's Investment Plan
Saving on the high street offers easy access and is a good starting point for kids, but low interest rates mean parents aren't going to accumulate much for their children beyond what they save themselves. Equity-based plans provide greater scope for impressive returns and investment trust savings plans are particularly attractive as they tend to have lower charges than the unit trust or open-ended investment trust alternatives.
Saving regularly in an investment trust also benefits from ‘pound-cost averaging', whereby your monthly savings buy more investment units when share prices are low than they do when prices are high – when you get less for your money. This evens out the highs and lows over time. On top of that, investment trust plans geared specifically for kids tend to be less risky than other investments and offer a wider spread of fund options.
Take this year's (and last year's) winner, the Aberdeen Investment Plan for Children. Aberdeen is highly regarded as an investment leader in Asia and emerging markets. Philip Pearson, a partner at P&P Invest, says it is "worthy of consideration" because of its "wide choice of funds". Chadborn says its appeal also lies in low charges: "It offers low minimum, regular and lump-sum contributions. These charges are competitive and easy to understand. The trust can be purchased directly or via an adviser."
The minimum lump sum required is £150, or £30 a month for regular savers. There are no initial or administration charges. F&C Investments takes second spot, thanks to its diversified portfolio. "Its investment plan for children provides a wide choice of funds across all asset classes, enabling a balanced portfolio to be constructed," says Pearson. He adds: "The company's website is clearly laid out, provides useful information and allows online investment."
PENSIONS FOR KIDS
BEST PENSION FOR KIDS
Winner: Scottish Widows stakeholder pension
Number of funds in pension: 35
Restrictions: Can invest in a maximum of 10 funds at a time
Charging structure: 1% a year
Contact: 0845 767 8910
Highly commended: Standard Life stakeholder pension
It might seem crazy to start paying into your child's pension but if you want to make sure they don't blow their money when they reach adulthood, you could play the long game and start building their pot. This year's winner is Scottish Widows' stakeholder option. McDermott praises the pension's flexibility: "You can change the amount you pay, stop paying for a while and restart again, all at no extra cost. The pension can be transferred into an employer's pension when the child has grown up and started working."
Pearson says Scottish Widows deserves its top position for providing "a comprehensive package for a stakeholder pension" and its good online facilities.
For the children's and youth savings account categories, we compiled data on interest rates for the months of March, June, September and November for the past five years. These were then aggregated to find the best accounts over the whole period. Accounts that only allow
local residents to join, significantly drop the initial interest rate, or only allow withdrawals when the child reaches the age of 18, were all excluded.
The winner of the pension plan in the Children's Savings Awards also won best stakeholder pension in the Moneywise Pension Awards 2011.
The winner and runner-up for the investment trust savings plan award for children has been voted for by the judging panel. Judges took into account minimum investment levels, fund choice and charges.
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).
A collective investment vehicle (known in the US as a “mutual” or “pooled” fund) and similar to an Oeic and investment trust in that it manages financial securities on behalf of small investors who, by investing, pool their resources giving combined benefits of diversification and economies of scale. Investors buy “units” in the fund that have a proportional exposure to all the assets in the fund, and are bought and sold from the fund manager. The price of units is determined by the value of the assets in the fund and will rise or fall in line with the value of those assets. Like Oeics (but unlike investment trusts) unit trusts and are “open ended” funds, meaning that the size of each fund can vary according to supply and demand of the units form investors. Unit trusts have two prices; the higher “offer” price you pay to invest and the “bid” price, which is the lower price you receive when you sell. The difference between the two prices is commonly known as the bid/offer spread.
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.
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.
An account opened with a clearing bank (few building societies offer current accounts) that provides the ability to draw cash (usually via a debit card) or cheques from the account. Some pay fairly minimal rates of interest if the account is in credit. Most current accounts insist your monthly income (salary or pension) is paid directly in each month and they offer a number of optional services – such as overdrafts and charge cards – which are negotiable but will incur fees.
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.