Saving for baby

By THIS IS MONEY
Updated:

 

We're expecting our first baby shortly and want to start some kind of saving plan for the child. What should we choose? For example, what is the better option - an ordinary savings account and an endowment policy with profits such as the one from Sun Life? MP, Buxton, Derbyshire

Kim North, independent financial advisor at Pretty Financial, says: First, you should know that if the child's investment produces more than £100 a year in income it is deemed as being the parent's for tax purposes.

Most parents want two types of investment for children - long-term, for things like school or university fees, and short-term, for gifts and pocket money, usually an account that the child can run his or herself when old enough.

Endowments are long-term - you have to invest for at least ten years to get a tax-free payout at the end, and they are safe investments offering steady growth with a terminal bonus. The Sun Life one you mention offers about 7% a year. But endowments are relatively inflexible - to get the tax benefit you have to keep up premiums for at least ten years, which cannot rise to more than double the original sum or drop to less than half of it.

More flexible long-term investments include unit trusts or investment trusts, both of which are share-based, which means you may get higher returns. Of course the risks are higher, but over a long period like 10 or 18 years highs and lows are likely to be ironed out. They are flexible - you can leave the investment in place for as long as you like and switch to different types of funds. Get information from the Unit Trusts Information Centre 0181 207 1361 (24hrs) and the Association of Investment Trust Companies 0171 282 5555, or their website www.aitc.co.uk and consider getting independent financial advice.

For medium-term saving consider National Savings Children's Bonds, currently paying over 6% gross over five years on £25-£1,000.

For bank or building society accounts shop around for a good rate (beware - some are offering even less than the rate of inflation) but also look at the package of goodies on offer, as this may help get children into the money management habit later on.

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