FINANCIAL planning can start at the cradle.
Even new-borns can see benefits from saving with appealing tax incentives. The clear message is to join the investment ladder as soon as possible.
A start can be made with a straightforward children’s account at a bank or building society. This will provide a convenient way to pay in small sums from birthday and Christmas money. The process should encourage the child to appreciate the merits of building up their savings, even though the rates for such accounts are usually derisory and do not even keep up with inflation.
Some children’s accounts come with gifts: Clydesdale offers a free watch for 6-10 year olds; Dunfermline has a piggy bank, discount vouchers and magazine; HSBC gives a globe moneybox for 7-11 year olds; Royal Bank of Scotland has either a moneybox or Ollie personal organiser, while Santander has the choice of a soft toy or portable mini-radio.
Meanwhile, the best rate of interest available for a children’s account is a fixed 6 per cent from the Halifax, when £10-£100 is paid in monthly. There are other methods of saving for potentially better returns. Consider two issues with an experienced independent financial advisor: who is investing, and how long should control stay with an adult before the proceeds are passed over?
A stock market investment is always going to win over a deposit-based arrangement in the long term. If £100 had been placed in a savings account in 1950, it would now be worth £1,560. However, the same sum invested in equities (assuming all income is reinvested) would have grown to £113,500 over the same period.
There are two government schemes, Child Trust Fund (CTF) and Junior ISA (Jisa) – a specifically established ISA (Individual Savings Account) for children, which are exempt from both income tax and capital gains tax. Only the 10 per cent dividend tax cannot be reclaimed.
Children born between 1 September, 2002 and 2 January, 2011 qualify for a CTF, and currently up to £3,600 can be contributed to it annually. To kick-start the scheme, the government paid the initial £250 (£500 for low-income families).
Many children were placed in “stakeholder” plans, which means that charges are capped at 1.5 per cent, and when the child turns 13, the money in the fund will be transferred to a lower-risk area. It’s important at this point to look at performance to date and, if it proves disappointing, to change to another provider, probably a non-stakeholder who will almost certainly ensure a better return.
The Jisa started in November 2011 and does not have a stakeholder version. Like the CTF, the fund must run to the child’s 18th birthday. Caitlin Loynd, wealth planning associate at the independent advisors Save & Invest, tips the Jupiter Merlin Worldwide fund. She says: “It has a good track record and benefits from being a multi-manager approach.”
Up to £3,600 can be paid in annually, which can go into a stock market-related investment or a cash interest plan. Alex MacLean, the managing director of Edinburgh-based Aspire Wealth Management, says that an additional aspect which should appeal to young investors is that when the youngster is aged 16 to 17, both a Jisa and an adult cash ISA can be held for those two years. Note, though, that any unused annual allocation amounts for the CTF and Jisa cannot be carried forward.
Paul Galloway, financial planning consultant at Edinburgh Risk Management, says his job is to advise clients on competing risks and persuading them “not to be excessively cautious” when selecting the right route for children. His company favours open-ended investment companies, unit trusts and investment trusts that “give exposure to a broad spread of companies and sectors and also offer some overseas exposure.”
Invesco Perpetual Children’s Fund and F&C, which operates a children’s investment plan that allows a mix-and-match approach from a dozen different investment trusts, are favoured by Galloway. The latter includes the Foreign & Colonial Investment Trust – the oldest collective on the stock exchange – and British Assets Trust, both with significant global equity exposure. To reduce volatility and help cash flow, both these investments accept monthly contributions.
For those who are not that keen on the idea of a youngster gaining a large sum at the tender age of 18, an investment can be made which is designated for the child, but has the control of the money retained by the adult up to a date they decide in the future.
This will allow for a wider choice of funds. Galloway recommends global growth equities, including M&G Global Growth and Jupiter Merlin Growth Portfolio.
Do not forget Premium Bonds, says MacLean, where sums of £100 up to £30,000 can be placed. However, he cautions that the odds of winning a million, or even £25, are poor and that the overall average interest rate of 1.5 per cent is not going to see any long-term return above the rate of inflation.
Another idea from both Galloway and MacLean is to invest in a pension for a child. With a stakeholder version, which is ideal for a child or grandchild with no earnings, up to £2,880 can be saved annually and the Inland Revenue will boost the value to £3,600.
Under current legislation, no access to the pension money will be allowed until the age of 55 and so the funds cannot be used for other major expenditure while growing up – notably university expenses, or even as a deposit on a first home.
Yet it is a tax-efficient way of saving and may come to be appreciated even more when the “child” contemplates retirement.