It’s the beginning of the end for child trust funds (CTF). In January they will disappear completely, but they are already being curtailed. Any babies born from 1 August will still get one, but the government contribution has dropped from £250 to £50. Lower income families will receive £100 rather than £500. And the top-up for seven-year-olds has been scrapped. So with CTFs fast becoming a thing of the past, how should you be saving for your child’s future?
If you want to teach your child the benefits of saving but are also happy for them to access the cash over a relatively short time frame, then a regular savings account is a decent option. These accounts allow you to pay in a certain amount each month and some offer good interest rates over a year. The best of the bunch is Halifax’s Children’s Regular Saver. It pays 6% and you can deposit between £10 and £100 each month in the account. After 12 months the account matures and your money will be moved into an easy-access savings account. So be ready to shift it to another account offering a better rate if you aren’t going to spend it.
Many parents will be thinking more long term. For example, you might want to save up to help your child buy their first car or pay for university. If this is the case then consider Northern Rock’s Little Rock Fixed Rate Bond. You have to lock up your money until 2013, but you’ll get a rate of 5% and you can invest up to £20,000. The account is held in the child’s name, with an adult as trustee, which reduces the tax bill too.
Children are liable to income tax in the same way to adults. But they also get the same personal allowance – the amount they can earn before they have to pay tax. In the majority of cases the chances are a child won’t earn more than their annual £6,475 allowance. So when you open the account make sure you (if your child is under 16) fill out HM Revenue and Customs form R85, then any interest paid on the account will be tax-free.
However, if you open an account for your child or step-child and that account earns more than £100 interest a year, then income tax at your own rate will be payable upon it. But this only applies to parents - it doesn’t apply to grandparents or anyone else who wants to put money into a child savings account.
Finally, if you want to think even more long term, a little bit of saving from you could turn your child into a millionaire when they retire. If you put a small amount (you can save up to £2,880 a year) into a self-invested pension plan for your child until they are 18, the tax breaks combined with the joy of compound interest will leave them with a £1m+ pension pot when they retire. That’s assuming a generous annual growth rate of 6%.
The downside is you’re locking up the money for a long time – they won’t be able to access it until they’re 55 at the earliest. It also assumes pension rules aren’t changed in the meantime. But equally you could be helping your child plan for something many of us may not get: a comfortable retirement. For more on creating a pension for your child, see: How to make your child a pension millionaire.