Independent financial expert Harvey Jones
answers a reader’s query about financial security for children
Yes, the abolition of the Child Trust Fund (CTF) was one of the first cuts announced by the coalition Government.
It was a savings and investment account for children living in the UK who were born on or after 1 September 2002. The Government automatically contributed £250 when a child was born and a further £250 when they turned seven.
Parents could pick a provider and they, as well as family and friends, could invest up to £1,200 a year tax-free until the child turned 18.
The idea behind the CTF was to help children understand personal finance and the importance of saving for their future – the account belongs to them and when they turn 18, the money is theirs to use as they think best.
However, the CTF was phased out for newborns over the last few months of 2010 and children born after 1 January 2011 aren’t eligible for the Fund.
The CTF isn’t completely dead, though. If your child already has one, you can continue to invest up to £1,200 a year until your child turns 18, and the money will continue to grow free of tax. You can even switch your fund to another provider, if you wish.
Fortunately, there are other tax-efficient ways of saving for your child, whether or not they are also eligible for a CTF.
You can open a children’s savings account with as little as £1.
Interest rates aren’t spectacular at the moment with the Bank of England base rate at a record low, but you can find rates up to 2% or 3% if you shop around – most internet comparison sites have a section for children’s savings accounts.
Don’t be distracted by gimmicks such as cuddly toys and piggy banks, it’s the interest rate that counts!
As your child gets older and their balance gets bigger, a deposit account will teach them a valuable lesson about saving regularly. (See our previous article, Helping the Bank of Mum and Dad, for more on this topic.)
A child can earn up to £100 interest a year (the amount you would receive on £5,000 paying 2% a year) on money given by a parent or step-parent, without paying any tax.
If they earn more than that, their entire savings are taxed at the parent’s rate, in order to prevent parents from transferring money to their child simply to cut their own tax bill. This rule does not apply to gifts from other relatives.
Another option is to look at a specialist children’s investment plan.
You could be putting money away for up to 18 years when you invest for your child, and over such a long period you’re likely to get a better return by investing in stocks and shares rather than leaving the money on deposit – in the long-run they have historically generated a much higher return than cash.
The Baillie Gifford Children’s Savings Plan, the F&C Children’s Investment Plan and Jump from Witan are among the specialist children’s investment plans available from fund management companies that allow to you dip a toe into the stockmarket.
Most allow you to invest in just £25 a month, have low charges and give you the freedom to start and stop at any time.
You can take them out either as a designated plan in your own name (which means you can access the funds at any time but will pay tax on interest), or you can put them in something called a ‘bare trust’, where the money is held by trustees on behalf of the child.
This means it falls out of your estate for inheritance tax purposes.
You cannot cancel the trust or access the money yourself as it all belongs to the child when they turn 18 (16 in Scotland).
Remember, though, that although historically the stockmarket has provided higher returns than cash accounts, the value of your investment can go down as well as up and you may not get back the amount you originally invested.
Another option is to pay £25 a month into a children’s bond offered by mutual societies such as Scottish Friendly.
These typically run for 10 or 15 years, invest in stocks and shares, and are tax-free. But be warned, the charges can be high, particularly if you cancel before the term has expired.
To compensate for killing off the CTF, the Government has announced a replacement called the Junior Individual Savings Account (Junior ISA).
Children can’t take out a grown-up ISA until they turn 16, but from autumn 2011 parents will be able to take out a Junior ISA on their behalf.
Unlike the CTF, there won’t be any government contribution, but plans can invest in both cash and shares and investments will grow free of tax.
Detailed plans and an exact launch date are still to be announced at the time of writing, but the Junior ISA is expected to have a similar annual contributions cap as the CTF – £1,200 a year.
So, the CTF may no longer be available to newborns – but there are still plenty of tax-efficient children’s savings products available. I’d recommend that as a parent you make as much use of these as you can in order to help your child with their first adult financial commitments when they’re older, whether that’s going to university, buying a car or getting on the property ladder.
- Harvey Jones is a freelance personal finance journalist who writes regularly for the Daily and Sunday Express, Motley Fool and lovemoney.com
- If you have a general financial query or dilemma unrelated to a specific financial services provider, email Harvey at firstname.lastname@example.org
- Harvey regrets that he cannot answer your questions individually. These are his personal views and not those of Virgin Money. Nothing in the article constitutes legal, financial or other professional advice.
- If you have a specific financial concern, you should always seek your own professional financial advice. All details given are correct as of 7 February 2011.
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