Christmas currency given to children from friends and family may still be lurking in the money boxes. It should stop losing value through inflation and be put to good use.
Both the Government and financial providers have a range of schemes designed specifically to encourage the young to save. To really build up a nest egg which will be valuable when they reach 18 years, 21 or even older, think long term and invest in the stock market.
Deposit-based plans are for the short term and to show youngsters their first steps in finance. Opening a money box, counting the notes and coins and depositing them across the counter of a bank or building society should be part of their education.
Saving regularly is not only a good monetary discipline but will iron out the volatility. Instead of having to decide on the exact moment to invest, drip-feeding some money is likely to produce the best results. Whilst this makes sense for the stock market, straightforward interest account providers also like this as it helps their cash flow.
Saving just £50 monthly over 18 years amounts to £10,800. Assuming five per cent average annual growth, it becomes £17,333. However, the reward could be far higher if invested in the stock market. The same sum saved through the average investment company over the last 18 years is worth £22,817.
According to research by YouGov SixthSense, 71 per cent of parents and 29 per cent of grandparents regularly deposit money into children’s savings and investment accounts with 14 per cent of other family members and four per cent of friends also contributing.
Tax, charges and inflation all work against savings. Unless a child is expected to receive income over £8,105 this year, to ensure no tax deductions, complete HM Revenue & Customs form R85. On charges, ask specifically about initial and annual fees. Helpful stock market providers will quote the Total Expense Ratio (TER) to ease comparison between products.
The best paying monthly children’s account (for those up to 15 years) is the Kid’s Regular Saver from Halifax. A fixed six per cent is earned when £10-£100 is deposited monthly.
It runs a year and can then be transferred to a Young Saver (paying two per cent) or fixed account (paying 0.90-2.60 per cent depending on the time agreed).
West Bromwich Building Society has the next best monthly rate at 4.60 per cent with again £10-£100 fixed for one year.
For a non-regular account, Virgin Money’s Little Rock 2 pays three per cent on £1 upwards.
If an incentive is more important than the interest for small deposits, consider:
n C&G Young Investor with money box and saving certificate: two per cent;
n HSBC MySavings with globe moneybox: one per cent;
n Nationwide Smart with discount vouchers and competitions: 0.75 per cent;
n NatWest Young Saver with folder, wallchart, stickers and piggy bank: 0.80 per cent;
n RBS Cash Club with Ollie personal organiser, money box and magazine: 0.50 per cent;
n Santander Flexible Saver for Kids with Scamp or Daisy soft toy or mini-radio: 0.40 per cent.
Junior ISAs (standing for Individual Savings Accounts) were introduced in November 2011. They can be held by any under 18 year old – even a baby – who does not have a Child Trust Fund (CTF). Up to £3,600 in this tax year can be sheltered in a Junior ISA with no income tax or capital gains tax liability. They run to 18 years when the money can be transferred to an adult ISA. No early repayment is allowed except on death or terminal illness.
Sarah Lord, managing director of Killik Chartered Financial Planners, says “grandparents and parents could make use of their annual £3,000 IHT gift exemption by putting money into a Junior ISA”. Not only would the child receive the money in a tax-efficient way but the money then grows in a tax-free environment.
Some advisers and parents dislike the fact that a late teenager will be able to access so much money (with either a Junior ISA or its predecessor CTF) and prefer instead to invest in the parental name with the intention of gifting it to the child at some future date. No capital gains or inheritance taxes are paid on regular donations, provided the money comes from income and does not affect lifestyle.
There are 31 providers of cash Junior ISAs, according to Moneyfacts research. The top two rates are six per cent for 16 years and older with Halifax and 3.25 per cent with both Coventry and Nationwide with the latter including 1.15 per cent bonus until January 2014.
JP Morgan offers an alternative with its Sterling Liquidity Fund which does not guarantee a specific interest rate.
Alternatively, children can hold a stocks and shares Junior ISA where the growth is likely to far exceed a deposit plan. Jonathan Baker, of Charles Stanley stockbrokers in Leeds, favours the Undervalued Assets and Regular High Income funds offered by their in-house Matterley. The former aims for long-term capital growth with sizeable holdings in Vodafone, HSBC, BP and Rio Tinto among others.
High yielding equities, UK bonds, government securities and preference shares form the latter portfolio and currently enjoy a 5.4 per cent yield.
Cazenove UK Opportunities, Schroder UK Alpha Plus and M&G Global Basics are the three funds favoured for a Junior ISA by Elizabeth Hastings of AWD Chase de Vere in Leeds.
They can be accessed through a fund platform. For a direct investment, Witan’s Jump is recommended.
“The beauty about investing for children is that generally the income is not needed and can therefore be reinvested which is a very powerful way of compounding returns,” says Martin Payne, Leeds director of brokers Brewin Dolphin.
He favours four investment trusts which can be placed in a Junior ISA:
n Foreign & Colonial whose dividend payment has increased in each of the last 40 years with a low 0.365 per cent management fee;
n Investors Capital ‘B’ which concentrates on large cap and yields five per cent pa;
n Templeton Emerging Markets with holdings mainly in China, Brazil, Thailand, Indonesia and India
n Murray International which invests mainly in equities worldwide including Asia excluding Japan, Latin America, Europe and UK.
CTFs continue for those children who qualified where the Government made an initial contribution.
Watch for fees, particularly with a Stakeholder CTF, most of which are UK trackers and charge the maximum 1.5 per cent.
Instead buy an HSBC index tracker with Bestinvest where the total annual expenses are just 0.27 per cent.
The difference in outcome is staggering: based on £300 per month over 18 years and a modest five per cent annual growth, the 1.5 per cent Stakeholder CTF child would be £11,413 worse off.
Finally, do not overlook a self-invested personal pension where a child can pay in up to £2,880pa and the Government adds £720, making £3,600. Such forward planning should produce a stunning pension.