Saving? It's a gift

By DAILY MAIL REPORTER
Updated:

 

CHRISTMAS may still be four weeks away, but now is the time to start planning a cash gift for your children. CHARLOTTE BEUGGE looks at the presents that will still have value long after Barbie's hair has fallen out.

• SAVINGS ACCOUNTS

MANY children receive cash gifts, so to stop them spending all their money on sweets and CDs, make sure they set up a savings account before the Christmas cash comes in.

But beware, because there are an awful lot of bad children's accounts with cute names but rotten interest rates. The worst offender is the Northern Ireland-only First Trust Bank, part of Allied Irish Bank. Its Cash Stash account pays just 0.1% gross.

On a deposit of £250 that means a Scrooge-like 25p interest a year.

On the mainland, the Scarborough Building Society should be thoroughly ashamed of its Young Super Saver account, paying 0.2%.

Top of the class is Alliance & Leicester with First Save, paying 4.55% before tax, Norwich & Peterborough HeadStart, at 4.05%, and Nationwide Smart2Save, at 4.04%. Other good deals include Halifax, Britannia, Coventry, Portman and Yorkshire Building Society.

To get tax-free interest, the child must be registered as a non-taxpayer with the relevant bank or building society. To do this, they, or their parent, must fill in form R85 (ask the bank or building society for a copy).

Savings accounts are usually opened in the name of the parent on behalf of the child. Once a child reaches seven, they can run the account themselves. ADVANTAGES: Very low risk. Children can run accounts themselves, teaching them about budgeting and saving. DISADVANTAGES: Inflation will eat away at returns. It's easy for them to withdraw cash so the nest egg is eaten into.
UNDER-THE-TREE RATING: 9/10

• OTHER DEPOSITS

SAVINGS bonds lock money up for a period and give a certainty of return. The rates beat the best variable rates on children's accounts - Nationwide pays 4.75% fixed for three years with a minimum investment of £1. Yorkshire Building Society pays 4.8% for three years on a minimum of £100.

Northern Rock pays 5.25% for three years on a minimum of £500. Children's Bonus Bonds, offered by the Government's own bank, National Savings & Investments, are a poor deal at 4.4% tax-free, fixed for five years. ADVANTAGES: Secure and certain returns. Children can't get at money and spend it. DISADVANTAGES: You won't benefit from increases in interest rates because these are fixed. But they are higher than variable rate accounts already.
UNDER-THE-TREE RATING: 6/10

• INVESTMENTS

FOR long-term growth, consider stockmarket-based investments. Unit or investment trusts pool the money of many savers to buy a broad mix of shares, thus reducing the risk.

You can invest a lump sum or make regular savings on behalf of a child.

In general, it is worth avoiding any schemes with gimmicky names. Invesco Perpetual's Rupert Children's fund has, according to figures from researcher Standard & Poor's, proved a poor investment.

An investment of £100 into this fund ten years ago would today be worth £149 after charges - well below the average UK All Companies fund, which would be worth £172.

It makes more sense to go for high-quality 'plain vanilla' big international funds such as the huge investment trusts run by Foreign & Colonial and Witan (which has a special savings scheme called Jump for children and as such is the exception to the gimmick rule).

Standard & Poor's figures show that £100 invested ten years ago into the Foreign & Colonial would now be worth £156 and £165 with Witan.

If investment trusts make you nervous, then good funds to look at include those in the relatively safe Fidelity MoneyBuilder range, or giants such as Invesco Perpetual Income.

The best way of holding a child's money is through a bare trust - the investment company should be able to set this up for you for little or no charge.

The trust will need trustees (you can be one) and they will control the investment until the child is 18 (or 16 in Scotland). This also has the effect of keeping the investment outside the present giver's estate for inheritance tax purposes. ADVANTAGES: Should outperform cash deposits. Regular saving means it is easy to invest from income. Not easy to dip into, therefore easier to build up nest egg. DISADVANTAGES: Charges will eat into your returns unless you pick well. Fund performance is not guaranteed.
UNDER-THE-TREE RATING: 8/10

• STAKEHOLDER PENSION

THE most long-term investment for children, as it can't be accessed until they are at least 50.

A child can have a stakeholder pension and invest up to £2,808 a year. The Government boosts this to £3,600. You can choose the fund the pension invests in - the most popular choice is an index tracker following the stockmarket. ADVANTAGES: Government top-up. DISADVANTAGES: Such a long-term investment that future legislation (let alone inflation) may make them useless by the time your child comes to retire.
UNDER-THE-TREE RATING: 2/10

• PREMIUM BONDS

THESE offer the chance of winning £1 million each month - without risking your stake. Only parents, grandparents and guardians are allowed to buy Premium Bonds for children.

They are sold in £100 tranches. However, the chance of winning £1 million is very unlikely: there's only a one in 30,000 chance of any £1 bond winning a prize of any size in each month's draw.

And it's likely that most of the prizes you pick up will be £50 or £100 ones. ADVANTAGES: Prizes are tax-free. More exciting than savings accounts. DISADVANTAGES: You have to be very lucky to win a prize as the return on Premium Bonds is now at its lowest ever.
UNDER-THE-TREE RATING: 5/10

• TAX

SANTA might give, but the taxman takes away. Just like adults, children need to be aware of the men from the Revenue.

Children have an annual tax-free allowance of £4,615 (for this tax year), the same as adults. If they have income above this level they must pay tax.

Few children will be taxpayers and as non-taxpayers they should be registered for tax-free interest, as described above.

Parents cannot use their children's personal allowance: if the child gets more than £100 interest from an investment given to them by their parents, all the interest will be taxed at the parents' highest rate.

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