Saving for children

If you're planning a family or have a child on the way, it's natural to want to start putting something by for the future.

Giving our kids a helping hand in their early years can get them into the saving habit; a great lesson for later life. Even the Government chips in! Take 10 minutes to check out your options.

Before you begin: Have a plan
Think about your objectives. To some extent these will depend on your children's ages and how much money you can spare. If the kids are very young, and you can afford regular payments over the long term, you could potentially build a real nest egg that they could use in early adulthood, for instance to pay off student debts or put down as a deposit on a first home.

Even relatively small amounts, if saved on a regular basis, can build up into a sizeable lump sum. If, for example, you saved £25 in a unit trust every month between a child's birth and his or her 21st birthday, and it grew at a realistic rate of growth like 7% a year, you'd have over £14,000 to give as a birthday present.

On the other hand, if you just want to be able to invest small amounts of money when you can, so that the kids can enjoy extra treats while growing up, there are options for you too.

Step 1: What is your attitude to risk?
Are you prepared to take a risk? Again, this may depend partly on how much you can afford to save and the length of time it will remain invested. Over the long term, stock market-based investments are likely to make you more money than simple cash deposit accounts. However, this fact can't be guaranteed, and you usually have to pay management fees on stock market-based investments, which may mean small investments are not cost-effective.

Step 2: Check out the Child Trust Fund
Child Trust Funds (CTFs) are the Government's gift to all children eligible for child benefit born on or after 1 September 2002. To kick-start the savings habit, parents are sent a free voucher worth £250 (£500 for low income families), which they can use to start a CTF for their child with a financial institution of their choice.

Family members can invest a further £1,200 a year into the fund until the child is 18. When they reach the age of seven, the Government will stump up a further £250 or £500. Any income generated by a CTF must be reinvested, but you don't have to pay any tax on what you make, and there's no tax to pay either when the fund goes to the child at the age of 18.

If parents don't invest their CTF voucher within a year, the Government will invest it on the child's behalf.

Step 3: Know your options
If your child is too old to qualify for CTF and/or you want to look at other investment options, there are plenty to choose from.

Most banks and building societies offer savings accounts for children. Often, however, these focus on gimmicks rather than a good interest rate, so look also at general savings accounts that may offer better rates and more flexibility.

NS&I (the old National Savings) offers Children's Bonus Bonds, which are tax-free. The minimum investment is £25 per issue (up to a maximum of £3,000); bonds run for a five-year term and can be held until the age of 21.

Premium Bonds are also a good choice for kids, with a fun element often lacking in other investments. They can be bought in the child's name and all prize money is tax-free.

Also, look at stocks and shares and related investments like unit trusts and OEICs. It is possible to hold these as a 'designated plan' for a child, but these will be taxed as if they are yours.

Step 5: Take advice on setting up a Trust
If you have a substantial amount of cash to invest for a child, then it may be worth setting up a trust. To do this you will need expert advice from a solicitor or other specialist financial adviser.

Step 6: What about Friendly Societies?
Tax-exempt Friendly Societies offer a unique tax-efficient product for children, but you can only invest a maximum of £25 per month per child, and deposits must be made regularly over several years otherwise the tax advantages are lost.

Step 7: Consider a pension
Implausible as it sounds, Stakeholder pensions are also available to children. This is long-term savings with a vengeance: an adult can invest up to £2,808 a year on behalf of a child (which the taxman handily makes up to £3,600 with tax relief). The downside is the money cannot be accessed until retirement, so it may take a very long time for your gift to be appreciated.

Step 8: Consider the tax position
Like adults, children are entitled to a personal tax allowance (£5,035 in 2006-07). However, if, as in the vast majority of cases, the money invested comes from a parent, any interest or income in excess of £100 a year is taxed as if it were yours. This rule does not apply if any generous friend or relative gives money to a child.