Moneywise Children's Savings Awards 2013
Setting up a savings plan for your child might seem like a flight of fancy when you're paying a second mortgage in childcare, spending a fortune on clothes they'll have outgrown in six months and buying enough food to feed a small army.
But if there's one thing that you can say about kids it's that they don't get any cheaper, as pestering for sweets and magazines grows to requests for cars, help through university and house deposits.
The good news though is that by putting away a little bit each month - or even better, encouraging your offspring to save some of their own pocket money - it's possible to build your child a nice little nest egg.
Whether you're looking for a home for birthday and Christmas money or can afford to pay a more sizeable amount into an investment scheme, the Moneywise Children's Savings Awards are here to help you find the right plan.
BEST CHILDREN'S SAVINGS ACCOUNT
Winner: Virgin Young Saver (formerly Little Rock Access Account Issue 2)
Current rate: 3% gross
Age range: Up to 16 alongside an adult
Interest paid: Annually
Minimum deposit: £1
Maximum investment: £10,000
Contact: 0845 600 4466
Highly commended: Chelsea BS Ready Steady Save
The simplest option for parents and kids alike is an instant-access children's savings account, which is great for teaching children about saving and interest. An excellent starting point is the winner in this category, Virgin Young Saver (formerly Little Rock Access Account Issue 2). It has paid a highly competitive 3% since its launch in 2010.
Gavin Haynes, managing director of Whitechurch Securities, says: "Some of the returns on children's savings accounts are miserly. However, Virgin deserves recognition for offering an attractive level of interest with instant access and a minimum deposit of just £1." The account can be run from one of Virgin's 75 Money Stores (branches) or by post.
Another good choice is our runner-up: Chelsea Building Society's Ready Steady Save, which has consistently paid 2% to young savers since 2009. To qualify for our awards all accounts had to be available nationwide, and while our winners are undoubtedly great choices, it's also worth checking out local building societies that can offer cracking rates to children living nearby. Bath Building Society's Future Builder, for example, pays 5% on balances up to £500 to children living in the South West.
YOUTH SAVINGS ACCOUNTS
BEST YOUTH ACCOUNT (FROM AGE 11 UPWARDS)
Highly commended: Yorkshire Building Society Freedom Account
As children get older it's likely they'll want more from their account - a cash card, for example, and the ability to manage it online. The top deal in this category is Santander's 11-15 Account.
Gavin Haynes says: "This is an excellent account to provide young people with a good starting point in managing their own funds. The interest rate of 2.96% gross on balances up to £500 is attractive, and access to online banking and a debit card is going to be appealing to teenagers."
The only condition is that account holders have to make at least one deposit a month. This makes a fantastic first current account, but because interest drops offat £500, children with bigger balances should have a separate savings account.
The interest paid on our runner-up account, Yorkshire Building Society's Freedom Account, is not as competitive at 1.74%, but worried parents may prefer the fact that they can restrict how much their children withdraw each month.
PENSIONS FOR KIDS
BEST PENSION FOR KIDS
Winner: Aviva Stakeholder Pension
Number of funds in pension: 40 available
Charging structure: 1% a year but 0.9% online
Contact: 0800 0927 869
Highly commended: Aegon
The ultimate in long-term saving for your kids is a stakeholder pension. For parents - or grandparents - who have shorter-term needs such as school fees and university costs covered, a pension is a very shrewd investment for a child. Not only do you benefit from tax relief to the tune of 20%, but there's much more time for the money to grow as the recipient won't be able to access the money until they're 55.
According to Scottish Widows, if somebody invested £3,600 (the maximum in one year) in a stakeholder growing at 6% a year on behalf of a child when it was born, it would have £82,900 at retirement.
Even better, thanks to tax relief this rather grand gesture would only cost £2,880. If a very wealthy relative was prepared to do this every year until the child turned 18, the lucky recipient would be a millionaire by the time they retired.
Our pick of the crop is the Aviva Stakeholder Pension. It can be opened for children with a monthly deposit of £20 and run with no more than a 1% annual management charge. It also has a good selection of funds.
Nick McBreen, IFA at Worldwide Financial Planning, praised its investment choice - of 27 internal and 13 external funds - and free fund-switching facility. The runner-up in the category was Aegon.
JUNIOR ISA INVESTMENT SAVINGS PLAN
BEST JUNIOR ISA INVESTMENT SCHEME
Choice of funds: 850+ investment trusts and funds from a variety of managers
Minimum investment: £50 a month or £100 lump sum
Annual fees: None
Contact: 0800 731 1111
Highly commended: Alliance Trust
Cash accounts are a great way of introducing kids to saving, but miserly interest rates mean they aren't so good if you want to help them out with bigger expenses. For real growth you need to consider equity-based options. This does carry some risk but if you start saving when your children are young, you should have plenty of time to ride out short-term volatility.
Investment trusts in particular are a great way of investing for children because they tend to have lower charges than unit trusts. According to the Association of Investment Companies, paying £30 a month into the average investment trust would typically earn a child £13,690.43 over 18 years. By comparison, the same sum invested in our winning cash account would earn the child just £8,578.21.
Many investment trust companies now run junior ISA schemes, which allow parents to invest on their children's behalf across a range of trusts - in some cases offering access to unit trusts, too. These offer an affordable - and tax-free - way of investing for children, accepting either regular monthly payments or ad hoc lump sums.
The winner in this category is the JPMorgan Junior ISA, which offers access to more than 850 investment trusts and funds from a variety of managers. "I liked this proposition because of the choice of funds available, cost, accessibility and ease of use. You can invest from £50 a month or a £100 lump sum and pay no annual or account fees," says Haynes.
Tim Cockerill, head of collectives research at Rowan Dartington, praised JPMorgan's expertise. "JPMorgan is a long-established investment trust manager with a worldwide presence and considerable resources."
The Alliance Trust Junior ISA was highly commended. It offers access to more than 1,400 investment trusts and funds from more than 40 managers. Anna Sofat, managing director of women's IFA, Addidi, says: "It's a good account for real fund choice but it's more expensive and transactions will have an impact on smaller sums, so it's better suited to bigger investors."
BEST CHILDREN'S INVESTMENT SCHEME
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: JPMorgan
It is hard to argue against the tax benefits of a junior ISA, but for children whose parents want more control over the money (junior ISAs become the property of the child at age 18), then a children's investment scheme that invests across a range of trusts may be a sensible option.
For the second year in a row, the award goes to Aberdeen Asset Management's Plan for Children. "This savings plan provides a wide selection of trusts from the Aberdeen stable, ranging from core low-cost trackers to Asian trusts where Aberdeen has an exceptional track record," says Haynes. This is also an accessible plan with minimum monthly savings of £30 and £150 for lump sums.
JPMorgan was the runner-up in this category. Cockerill says: "Choice across a quality range of trusts is what sets JPMorgan's savings plan apart. Minimum investment amounts are not the lowest available but charges are very competitive."
For the children's and youth savings categories we analysed five years of historic interest rate data from Moneyfacts. The results were aggregated to find the most consistent, high-paying accounts. Accounts needed to be available to children across the UK and offer instant access.
The winner in the pension category was the winner of the best stakeholder pension from the Moneywise Pension Awards 2012.
The winners in the best "Junior ISA Investment Scheme" and "Best Children's Investment Scheme" categories were selected by a panel of independent judges. We asked them to take into account investment quality and choice, charges and accessibility.
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.
Available from 1 November 2011, the Junior ISA will replace child trust funds (CFTs), which have been phased out. Junior ISAs will have a £3,000 limit and will be offered by high street banks, building societies and other providers that currently offer ISAs to adults. You can invest in either stocks and shares or cash. But, unlike CTFs, there will be no government contributions into each child’s savings pot. Money invested in Junior ISAs will be “locked in” until the child is 18, and the ISA will default to an adult one.
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).
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.
An overdraft is an agreement with your bank that authorises you to withdraw more funds from your account than you have deposited in it. Many banks charge for this privilege either as a fixed fee or charge interest on the money overdrawn at a special high rate. Some banks charge a fee and interest. And other banks offer a free overdraft but impose very high charges for exceeding the agreed limit of your overdraft.
A financial adviser who is not tied to any financial services company (such as a bank or insurance company) and is authorised by the Financial Services Authority (FSA). They can advise on financial products to suit your circumstances. All IFAs have to give consumers the choice of paying by fees or commission and have to explain which would best suit the customer in that particular instance. Also, if commission is paid either by the client or the financial service provider recommended by the IFA, the IFA must disclose what that commission is.
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.
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.
Issued by a bank as part of a current account and, in a nutshell, serves as electronic cash. Unlike a credit or charge card, where you get an interest-free period before you have to settle the bill, the funds spent on a debit card are withdrawn immediately from your current account. Unless you’ve arranged an overdraft, if you don’t have the cash in the account, you can’t spend it.
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%.