Cash Clinic: Alternatives to trust fund to help build up youngsters' nest-eggs

Q. I have a grandson, with a grand-daughter arriving next February. I contribute regularly to my grandson's child trust fund (CTF) and had always planned to do the same for my granddaughter when she arrives. With the government's announcement that CTFs will be axed from the end of this year, I am wondering how to save for my grandchildren going forward. Should I still contribute to my grandson's CTF even after the government scraps CTF vouchers? And are there alternative tax-efficient ways to invest for my grandchildren's future?

CS, Newtonmore

A. The CTF was a noble idea, aiming to kick start a longer-term savings and investment culture for our children and grandchildren. A 250 voucher was provided to all babies born after 1 September, 2002. For families with lower incomes, a further 250 was paid.

This was available to save as cash in designated CTF accounts or invested in pooled investment funds. Growth is tax-free and the investments could be topped up by parents, grandparents, family or friends with a maximum overall annual contribution of 1,200. The child could to make decisions on how their CTF was managed from age 16 but could not access the funds until they reached 18.

The government recently announced that it intends to first reduce and then stop its payments to CTFs at the end of this year. However, private contributions of up to 1,200 a year can continue to be made to existing CTF accounts. There is a campaign to retain CTFs as a tax-efficient savings option, without the voucher payments, but it's considered a long shot. As you can still pay contributions into your grandson's account, provided you remain happy with the underlying account or investment fund, it seems sensible to carry on.

You have various options for your granddaughter. You could open a bank account for her and make payments into this. Interest can be paid gross provided that she is a non-taxpayer.

The account could be in your name and designated for your granddaughter but remain under your control until she reaches 16 (Scotland) or 18 (England and Wales). You could also consider a children's bonus bond from National Savings & Investments. These offer a fixed term return, which is tax-free.

If you were prepared to take a degree of investment risk with the aim of improving longer-term returns, you could also consider investing regularly in a collective investment scheme or regular savings investment trust. Again, the investment could be designated for your granddaughter but remain under your control until she reaches majority.

If you are worried about a child attaining control of funds at 16, you could consider setting up a trust that specifies entitlement at a greater age. If this is of interest or you were thinking of investing larger amounts, I would suggest that you consult a solicitor and independent financial adviser.

• Glen Gilson is a partner and head of private client and financial services at HBJ Gateley Wareing.

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