It’s never too early to start investing in your child’s future. There is no one investment vehicle that is perfect for everyone. Investing in your child is generally a long-term issue so you need to look at what you can afford to invest and the potential risks before selecting the option that is best for you and your child. Here are five options to get you started.
Child Trust Fund/Junior ISAs (Individual Savings Accounts)
The newest tax-friendly investment option for children under 16 in the UK is scheduled to be officially launched on 1 November 2011, although accounts may become available sooner than that. They are being introduced by the government to replace the old Child Trust Fund option for children born after 3 January 2011. Any child under the age of 18 who does not currently have a Child Trust Fund will qualify for a Junior ISA. The annual contribution limit is £3,000 and parents can save it either in a cash deposit account or a fund holding stocks and shares.
Qualified children can have one of each type of account in their name and the funds will be locked in until the child is eighteen. At that time the accumulated funds will be automatically converted to an adult ISA and withdrawals can be made. You will not be able to transfer funds from a CTF to a Junior ISA or vise versa, but in the interest of fairness, the contribution limits on a CTF has been increased from £1,200 to £3,000. If you contribute £3,000 a year over eighteen years, particularly into a stocks and shares account and given a six percent return, your child will have close to £100,000 tax free, enough money to fund their education or invest in their first home.
Children’s Bonus Bonds
A National Savings and Investment (NS&I) product, Children’s Bonus Bonds are backed by HM Treasury. They provide a long-term tax-free investment with a fixed interest rate for five years. If held for the full five years, you receive a bonus. These can be purchased for £25 up to £3,000.
Index-linked Savings Certificates
Another tax-free NS&I product offers a fixed interest rate but is linked to the Retail Prices Index, ensuring that the value of your savings stays ahead of inflation. Index-linked Savings Certificates can be purchased for children aged seven or older for £100 up to £15,000. They offer compound interest over a five year term.
Stock Market Investments
If you want to take your chances with the stock market, a number of investment firms offer products designed for children. These are often collective funds such as a unit trust, investment trust or an open-ended investment company. You usually have the option to open the account in the child’s name, but retain total control over the funds and have access to them or you can establish a bare trust, in which you are the trustee but have no access to the finds. In the latter case, the child controls the funds once they reach the age of majority.
A Stakeholder Pension
Some families opt to start investing in their child retirement fund when they are born. Parents, grandparents or other adults can set up a stakeholder pension for a child under 18 and contribute a maximum of £2,880 a year, which is subject to 20% tax relief, topping up the contribution to £3,600. The funds cannot be accessed until retirement and are under the control of a pension trustee. Due to compound interest, making maximum contributions to a pension for the first 18 years of the child’s life will create a bigger pension pot, than if that child contributes the same amount annually to a pension plan for the rest of their working life.
Investing in your children is the perfect way to give them a good start in life. Don’t worry if you can’t afford to invest the maximum allowable amounts – invest what you can. Remember, the sooner you start the better.
Written by Muzammil Bashir, Senior Editor of myeggnest.com – a comprehensive online guide to saving for your children’s future.