Investing’s not just for grown-ups, so focus on the long term and set the youngest member of your family on the path to a secure financial future, says Conal Gregory
THE earlier a child starts saving, the greater potential the money pot has to grow. It was Albert Einstein who said: “Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn’t, pays it.” Thinking long term will not only give a child a financial footing but encourage them to know about the world of money.
Start with a savings account. The best-paying accounts are for monthly subscriptions, with pole position held by Halifax with a fixed 6 per cent for its Kid’s Regular Saver, which requires £10-£100 to be deposited monthly. After a year, the money can be withdrawn or transferred to a simple savings account and the process started again. The next best-paying monthly at 3.60 per cent is West Bromwich Building Society.
Another idea is to open a child’s deposit account. The best rates just beat inflation (2 per cent CPI or 2.7 per cent RPI): 3 per cent (C Hoare Children’s Savings, Halifax Young Saver), followed by 2.97 per cent (Bank of Scotland Young Saver, Lloyds Young Saver, TSB Young Saver). However, guard against opening one of the very poor payers, like 0.10 per cent (Bank of Ireland), 0.25 per cent (Britannia, Co-op Bank) or 0.38 per cent (Darlington).
Don’t forget to complete Inland Revenue form R85 to make sure interest is paid gross.
If only small sums are available from birthdays and Christmas gifts, it may be an idea to forego some interest in place of an incentive or two. Clydesdale offers a free watch (six to ten years old with Jumpstart), Dunfermline gives a piggy bank and discount vouchers on its S account up to ten years, HSBC has a money-box with its MySavings account for seven-to-17 year olds, while Santander gives a Scamp or Daisy soft toy or mini-radio with Flexible Saver for Kids (up to 15 years).
Friendly societies are able to offer tax-exempt savings plans which are ideal for children. Monthly amounts up to £25 or an annual £270 – the amounts do not equate – are allowed. The accounts run for between ten and 25 years, with an 18-year-term proving a popular choice for a newborn. Apart from Scottish Friendly, look at the excellent returns from Sheffield Mutual and Kingston Mutual. However, there is no access to the money before maturity.
Few realise that a pension can be started for a day-old child. Starting retirement planning at a young age brings great long-term returns. Currently, an annual premium of £2,880 is available for any non-earner and is topped up by the government to £3,600. Talk to an IFA about alternative routes, including a self-invested personal pension (SIPP).
There are two special schemes to encourage youngsters to save: Child Trust Funds (for those born September 1 2002 to January 2 2011) and Junior ISAs (for all others under 18 years). However, the interest rate is derisory in most cases, notably for many of the six million children in the former scheme. Instead, switch to an equity-based plan. While there will be volatility in stock market investments, this is a saving for many years ahead. The FTSE 100 (the leading companies quoted on the London Stock Exchange) rose 14.4 per cent last year – the best 12 months since 2009.
Although most FTSE 100 firms trade internationally, a good tip is to ensure some of the savings are placed in overseas markets to gain from their growth rather than to have too many eggs in one basket.
Up to £3,720 a year can be invested in a Junior ISA, rising to £3,840 for the next tax year. Anyone – not necessarily the parents – can contribute to this limit. The investment rolls up tax-free, apart from a small tax on dividends. It becomes an adult ISA when the holder becomes 18, which is the first time he or she can access the money.
Amazingly, only 15 per cent of parents whose children qualify for a Junior ISA have opened one, while every new born in the qualifying period had a Child Trust Fund as incentive vouchers were issued and, in default, the Government arranged for a provider to act on behalf of the parents. Of those who have started a Junior ISA, just 10 per cent have saved the full allowance.
There are many competing providers for an equity Junior ISA. There is the tracker route, which seeks to replicate a published index of companies, such as the Scottish Widows UK Tracker (through Bank of Scotland). Ethical saving is widely available, including Alliance Trust, FundsNetwork, Legal & General, Pilling, Redmayne-Bentley and The Share Centre.
Several investment trusts offer plans, including Alliance and Witan and, unlike unit trusts, such trusts have independent boards of directors, who act in the interests of savers.