A Child Trust Fund is the starting point for shrewd grandparents, writes Conal Gregory
WITH fees for education spiralling, grandparents can certainly help to cushion the costs. School fees have jumped 40 per cent in five years and already a university education is likely to cost over £10,000.
The Child Trust Fund (CTF) should be the
starting point. All children born after September 2002 are eligible, making it the UK's first universal long-term savings account. The CTF has created a new thinking in helping children onto the financial ladder. Just six years ago, one in five families saved for their children and now every child aged six or under has a CTF account to pay out on their 18th birthday.
Grandparents and anyone else can contribute up to £1,200 a year to top up the account, which is tax-exempt. Check on the performance but, over such a long time frame, it makes sense to initially opt for a fund in emerging markets and commodities.
Kate Philip, managing director of financial advisers Independent Women, says grandparents can use their annual gift allowance or the normal expenditure from income exemption to pay net annual premiums to a CTF and to start a personal pension for a child.
Alex MacLean of Edinburgh-based Aspire Wealth Management suggests going for a stakeholder pension scheme. Introduced in 2000/2001, "such arrangements can be quite appealing for those who wish to provide long-term value for future generations, where contributions secure tax relief at 20 per cent," says MacLean.
This means that for an annual investment of £3,600 gross before charges, the actual cost after tax relief is just £2,880. Look at life offices with several fund choices, such as Scottish Life and Scottish Widows. It certainly makes sense to invest as early as possible in a child's life. To miss out the initial years can greatly affect the outcome. An initial investment of, say, £10,000 with six per cent compound interest would be worth £23,966 after 15 years and £32,071 after 20 years.
Edinburgh Risk Management's Ian Lambie suggests using offshore bonds. This enables an investor to build up capital tax-free over several years and can then assign segments to their grandchildren, making it an ideal way to help with college costs or to fund the deposit on a first home. The segments are normally paid out tax-free provided they fall within a child's tax-free allowance (£5,435 this year). The grandparent retains control of the investment policy and it only goes into a child's name when it is encashed.
Both National Savings Children's Bonus Bonds (which accept between £25 and £3,000 for issue 30, paying a fixed 4.45 per cent for five years) and Halifax's Children's Regular Saver (paying 10 per cent fixed for a year on monthly £10-100) are also recommended by Philip.
Another idea is a tax-exempt friendly society child savings scheme, which runs for at least 10 years but can be set for longer periods. From £25 monthly or £270 annually can be invested. Scottish Friendly is one of the leaders. Kingston Unity currently pays 10.48 per cent annually.
The full article contains 545 words and appears in The Scotsman newspaper.
