It’s never too soon to start investing. Despite the current serious global economic difficulties, the long-term benefits of saving for decades forward are immense.
Many parents and grandparents want to help children with such future expenses as education or for a deposit on their first property or to buy their initial car.
The compounding effect of securing returns on either dividends or interest should be the incentive to start as soon as possible. Whilst shares have increased 18.1 per cent over a decade, their growth when dividends are taken into account is a far more impressive 69.3 per cent.
By helping the younger generation now, there is also the possibility that no inheritance tax will have to be paid if the person gifting lives for another seven years. Otherwise a penal 40 per cent will be levied once an estate exceeds £325,000 (reduced to 36 per cent if 10 per cent or more of the net estate is left to charity).
It makes sense to use tax-efficient ways to help a child. Even a baby has a personal allowance of £8,105 and a capital gains limit of £10,600 and so ensure any savings account is set up on a gross basis.
There are several specific tax-efficient ways to help:
• Child Trust Fund up to £3,600 annually;
• Junior ISA up to £3,600 annually;
• Stakeholder pension up to £2,880 annually (which is topped up to £3,600 by the Government);
• Tax-exempt friendly society savings scheme up to £25 monthly or £270 annually;
• NS&I Children’s Bonus Bond £25-£3,000 per issue pays 2.50 per cent over five years.
The Child Trust Fund (or CTF) was a scheme for babies born between September 1, 2002 to January 2, 2011 with an initial investment by the Government. If parents did not invest the voucher sent, the Inland Revenue arranged for a panel of financial providers to step in so that no baby would be left out.
The interest and dividends created within a CTF grow tax-free. Anyone can contribute and so this is an ideal way for a godparent or relative to donate to a child’s future.
Sadly, many investment providers did not offer CTFs as they felt few would top up to the permitted maximum and they would be left with many small accounts to administer.
AWD Chase de Vere advise on equity CTF (and JISA) and currently like JP Morgan Emerging Markets and Fidelity Moneybuilder UK Index.
Although no new CTFs can be started, the scheme continues until each child’s 18th birthday. It’s vital to look at performance and switch provider if the results are disappointing.
With a cash-based CTF, the rates can be low. Nationwide pays 1.10 per cent but increases this to 2.10 per cent if regular contributions are added.
Junior Individual Savings Accounts (JISA) were launched on November 1, 2011 for all children under 18 years who are not eligible for a CTF. Whilst they do not benefit by a Government contribution, they are a great way to help a child build up a valuable nest egg in a really tax-efficient way.
At 18, the JISA is converted into a standard ISA and so the growth can be rolled over without being taxed.
Some relatives are put off placing too much money in either a CTF or JISA as the youngster can access all the proceeds when they reach 18 years. If this is a concern, a trust needs to be set up with a later age such as 25 or even 30 years for access.
A stakeholder pension is taking a really long-term view but means a child, even a baby, can look forward to decades of investment growth. Under current legislation, access is not available until 55 years. If the maximum is saved from birth, even with no growth, the pension will have accumulated £64,800 by the time the youngster turns 18.
A child’s bank or building society account is useful to encourage youngsters to see where their birthday or other money can be deposited. Often providers will give money boxes, notably Cheltenham & Gloucester (Young Investor), HSBC (MySavings), and Royal Bank of Scotland (Cash Club).
Whilst the interest rates are often poor, it is the fun element in being given gifts on opening plus learning about money transactions that compensate.
Nationwide gives discount vouchers and competitions (Smart); NatWest have a folder and wallchart with stickers (Young Saver); RBS gives an Ollie personal organiser (Cash Club); and Santander provides a Scamp or Daisy soft toy or portable mini-radio (Flexible Saver for Kids).
Watch for restrictions, such as no withdrawals until 18 (Harpenden), 16 (Buckinghamshire with A* account or Yorkshire Bank’s Child Savings Bond) or seven (Coventry Junior Sky).
Whilst the rates are often below two per cent, research by Moneyfacts shows that to gain a far better interest, opt for children’s regular saver accounts. Halifax is way out in front with a fixed six per cent when £10-£100 is saved monthly. After a year the proceeds can be rolled into another children’s account (like their four per cent five-year bond) and a new regular saver started.
West Bromwich pays 4.60 per cent (£10-£100), Principality 4.50 per cent (£10-£150) with Mansfield and Newcastle paying three and 2.98 per cent but allowing both smaller and larger monthly sums (£1-£500 and £1-£250 respectively).
JISA, like the adult ISA, can be either cash or equity based.
For a cash version, the best rate for new savers pays 3.25 per cent (Coventry, Nationwide). The latter includes 1.5 per cent bonus until January 2014.
An equity JISA is likely to show far great appreciation. Emerging markets should be the current target where almost 75 per cent of world growth is expected this year with forecasts of 6.8 per cent for Asia, 3.6 per cent for Latin America but only 2.3 per cent for USA.
Lauren Charnley, at Redmayne Bentley stockbrokers in Leeds, says to avoid single equities owing to their higher risk profile and opt instead for M&G Global Dividend or Franklin Templeton UK Mid Cap.
Friendly societies have been able to offer a tax-exempt savings scheme for years. Whilst most are designed to run for a decade, they can be programmed for far longer.
As friendly societies are mutuals where the members are effectively the shareholders, their returns are often high. The best performers are consistently yielding 9-12 per cent annually (Druids Sheffield, Sheffield Mutual).