Investing wisely for your child

Published by Sam Barrett on 12 December 2007.
Last updated on 23 August 2011

Child with piggy bank

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.

Savings products

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.

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