Children's savings: Alternatives to Child Trust Funds

Monday, 24 January 2011 02:51

By Kate Saines

On January 1st this year Child Trust Funds (CTF) were dealt a huge blow when the government pulled its contribution to the scheme.

It means babies born on or after this date will not qualify for the £250 voucher (£50 if born after August 1st 2010) that all newborns previously received to open these tax-free investments. And they will not be eligible to open a child trust fund.

If you are a parent of a child who was eligible for a CTF investment, you will still be able to make contributions and your son or daughter will be able to access the cash built up on their 18th birthday.

But what if you did not qualify and still want to start saving for your children? What options are available? Here's a look at some of the savings plans available specifically for kids.

Junior ISAs

Junior ISAs have been created as a replacement for CTFS and are due to be launched in autumn this year. Like CTFs they will provide a tax-free, 18-year investment vehicle for children.

In contrast to CTFs, however, the government will not be making any contribution to the ISAs.

The exact details of the savings plans have yet to be finalised – for example we do not yet know the annual limit on contributions.

But we do know that babies, born from January 1st 2011 onwards will be eligible to open a Junior ISA.

The question is, if you have a child born between January 1st and the launch of the ISA what do you do with any money you wish to invest?

Colin Jackson of Baronworth Investments suggests placing it into an easy access savings account, and then transferring it to an ISA at the earliest opportunity.

We also know that Junior ISAs will, like traditional ISAs, allow the holders to invest in stocks and shares or cash.

Cash ISAs will obviously be less risky but have lower interest rates while the more uncertain stocks and shares plans will be likely to return better returns in the long term, but there is also the risk their value could fall.

Mr Baronworth added: "The good news is the money is not accessible by the child until he or she turns 18 which means, particularly for very young children, a stocks and shares ISA could be favourable giving sufficient time to iron out the ups and downs of the equity market."

Traditional ISAs

If you cannot wait until autumn to start saving, and don't fancy putting the cash into a low interest savings account until then, what about saving for your child using your own ISA allowance?

A survey carried out by Fidelity Investments revealed one of the top three reasons adults save their cash was to provide savings for their children or grandchildren.

"Yet many," said Rob Fisher, head of UK personal investments at Fidelity, "are still not getting full benefit from available tax breaks."

He added: "Saving for children really is achievable for many people. Saving just £50 per month, which is roughly the equivalent of a daily cup of coffee or gym membership, into a mutual fund, could be worth just over £9,600 if invested in the stock market over a period of ten years."

The figures speak for themselves. An investor who put their full ISA allowance into the Fidelity Special Situations fund since the tax-free savings scheme was launched in 1999 would have received £168,264 from a total investment of £87,600, Mr Fisher said.

This is just an example of one fund, which has had good returns over ten years. If you are not keen to invest your money into the markets, you could always opt for a cash ISA.

Returns are not great at the moment on savings products, but because they are tax-free, ISAs are the best option and your first £5,100 should always go into this tax free investment.

Read our free guide to Child savings accounts.


Bonds are a long-term regular savings plan and there are currently lots of them on the market aimed at the post-CTF market.
Family Investments, for example, has just launched its Junior Bond in partnership with Bounty, the parenting club.

The idea is that parents contribute to the bond 'little and often' by depositing between £15 and £25 per month. Returns are described as 'tax efficient' providing the payments are maintained for at least ten years.

So are they any good?

Alison and Robert Downs, both 31, from Darnley in Glasgow opened a child bond with Scottish Friendly for their two-and-a-half year old daughter, Millie, to complement the child trust fund already opened.

They wanted an investment plan to provide Millie with some additional financial security in the future.

"I've become much more aware of saving for Millie's future in the past year or so with the current economic climate," Alison explained.

"I want to make sure I've got a pot of money for her future which can go towards her further education or even a deposit on a flat.

"Neither Robert or myself are very good at saving, but I want to instil that habit in Millie from a young age so she understands the importance of saving for her future and managing her finances."

All growth in Scottish Friendly's bond is tax free and the child will not need to pay income tax or capital gains on their payout.

Parents can choose between two options for investing – £10 to £25 per month or between £120 and £270 a year. Lump sums can also be deposited – popular, apparently, with grandparents.

Premiums are invested in Scottish Friendly’s with profits fund, which invests in a range of assets for long term growth.

A degree of security is provided with the plan because there is a guaranteed minimum cash sum at the end of the bond’s life. Life cover for the child is also included. 

Government-backed bonds

National Savings & Investments (NS&I) offer tax-free children's bonus bonds, these are five-year investments which earn interest annually. A bonus is paid after the five years.

NS&I regularly releases new versions of these bonds, and the latest offers interest at 2.5 per cent.

Premium bonds are also an option. Each bond you buy is put into a prize draw and if you win, the prizes are tax-free. These provide a great way for relatives to provide financial gifts.

Children's Savings Account

It might seem a bit obvious, but how about saving using an old fashioned bank account? While rates are not particularly great in the savings market at the moment, it's still a good way of putting money away for your child's future with very little risk and complication.

As an additional bonus, as your child grows up they can use the account themselves and this will also teach them how money works, and how to budget.

There are accounts paying up to six per cent interest – but often these are only open for one year, or a limited period. Longer-term accounts tend to pay interest at much lower rates, typically under one per cent at the moment.

Still, 0.5 per cent is better than nothing. And if you are committed to saving in the long term, you could eventually benefit if and when interest rates begin to rise again.

Use the comparison tools to find the best savings account.

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