Youngest savers set to lose interest as returns plummet

Published on Saturday 11 April 2009 13:48

EASTER is a time for chocolate treats for children, but health-conscious parents, aunts and uncles and grandparents often prefer to help them build a financial nest egg with gifts of cash.

This year, however, they could be forgiven for wondering if there was any point. The returns on children's savings accounts have plunged to derisory levels, while the value of many child trust funds have been slashed by more than a third.

Savings institutions have traditionally behaved with uncharacteristic generosity towards children, by paying attractive returns compared with interest rates generally. They would also offer them a range of free gifts and regular communications such as magazines and birthday cards.

They could afford to do this because the balances were small, so the sums involved tiny. But they also claimed to view encouraging saving in young people as vital to developing prudent habits for the future. Plus they hoped the child would remain a customer later in life.

In the current climate, parents and other relatives may wonder whether better value might not be had in letting them rot their teeth.

The returns on many children's savers are derisory, and as low as 0.1%, and the free gifts have been pared to the bone. Despite the small cost of keeping faith with children, most institutions have pulled the plug.

Putting money away for children normally makes sense because of the generous tax breaks available. Each child has a personal tax allowance, which means they can earn 6,475 in any year in interest on cash given to them by anyone apart from their parents.

When it comes to their parents, they can earn 100 interest tax-free from cash given to them by each parent, making a total of 200. They also have a capital gains allowance of nearly 10,000, which allows them to cash in gains on equity investments tax-free.

Most children enjoy going to a bank or building society branch, and opening or managing their savings. This can help them develop habits of thrift to last a lifetime.

But it has never been more important to keep an eye on the rate, as out of a very poor pack, some are still better than others. The Scottish Building Society will pay 1.75% on a minimum of 100, the Nationwide 1.25% on as little as 1, and the Skipton 1.8%.

A Nationwide spokesman said: "They are low but we are in a historically low interest-rate environment. They are still better than is available on instant access on some adult accounts."

Much better are the returns on regular savers with Halifax paying 8% on monthly deposits of between 10 and 100 fixed for a year.

But it is the child trust funds which have really taken a dive and, given their recent performance, many will question whether there is any point throwing good money after bad.

The Government had invested more than 1bn of taxpayers' cash in these accounts as a savings sweetener to every child born after April 6 2005. Some 80% of this cash was invested in the stock market, much of it in tracker funds. The plunge by around a third in the FTSE index of the UK's 100 leading companies has led to speculation that more than 300m has been wiped out in the capital destruction which followed.

However, David White, chief executive of the Children's Mutual, one of the main proponents of the funds, is keen to reassure worried parents, who have watched helplessly as the value of their children's investments have fallen.

He said: "If you are investing long term for your children, then it makes sense to be in equity investments, and these do go up and down in price. There is no loss if you haven't crystallised it. But these are long term investments with many years to run. Markets will recover.

"The important thing is that we make sure every child has a nest egg to look forward to when they reach 18, which can give them options and a start in life. By the time they reach 18, I'm convinced both they and their parents will be glad they have a lump sum maturing."

Since April 2005 the parents of every child has been sent a voucher for 250 with a top-up of a further 500 at seven. If nothing else is saved, then the child can cash in 500 plus whatever growth or interest has been achieved when he or she is 18.

Poor children receive twice this amount, or a total of 1,000. These investments grow tax-free, and anyone else can make deposits in a trust fund, up to 1,200. Of those accounts receiving additional savings, the average monthly injection is 24.

The Children's Mutual estimates that based on a 7% growth rate, which looks unlikely to put it politely in the current climate, the average account will mature at 18 at more than 9,000. The disadvantage with the accounts is that although they provide a tax-free shelter, the money cannot be touched until 18.

However, although they were introduced to give a cash boost to the less well-off, their greatest use is probably in passing money down the generations for wealthier families. They will allow grandparents for example, to invest tax-free in their grandchildren's further education.

'My baby's got a cracking nest egg'

DONNA Murray was determined to get her baby Katie-Rose's future on to a firm footing when she was born 15 months ago.

"I was determined to make sure I had the money to give her everything I could, and all the things she needed as she grew up," said the Edinburgh mum.

So Donna opened a regular savings account with Halifax Bank of Scotland and is paying in 50 each month.

She said: "I saw the rate was good. The regular saver is paying 8% which is impossible to get anywhere near elsewhere at the moment. And I wanted to start saving for her, but I wanted the money in an account which I could get the money out of as she grew up.

"When she starts school and as she goes through her education there will be all sorts of expenses I'll need to meet.

"This way I will know I've got a nest egg for her, and it's earning a good return."