Help your kids save

By JO THORNHILL
Updated: 19:00 EST, 6 September 2000

Children are to learn basic personal finance in schools as part of the National Curriculum. And one way parents can encourage their children is by helping them save and invest. So where can you invest for them?

Traditional bank and building society savings accounts are not always the best option for long-term saving. It is better to look at longer term, stockmarket investments. Saving just a small amount each month can help build up a significant nest egg for higher education, travel, a car or even starting up a business when the child reaches 18.

Anne McMeehan, at the Association of Unit Trusts and Investment Funds (AUTIF) says it is never too early for children to start saving. She says: We think it's essential children learn about managing money. Personal finance is not a nice to know subject, it's a have to know. With more students going into higher education now often the first thing they land themselves in is debt. It is becoming increasingly important for young people to learn how to manage their money and savings.'

TOP FUNDS

James Dalby, at financial adviser Bates Investments, says: 'Parents investing on behalf of a child are usually looking for a medium to long-term investment so equity-based funds are going to offer the best returns compared to savings accounts.

'Some funds are marketed towards people saving for children, but they're often not the best ones. Fidelity International is a good fund which has a broad geographical spread and is a well-proven fund.'

Jason Holland, at Best Investments, recommends parents go for Index tracker funds. These have low charges and are often the cheapest way to invest in equities. He recommends HSBC or Legal and General.

He says: 'Cash is the worst place for a long-term investment such as this. If the money is to be invested for 18 years it makes sense to be wholly exposed to the stock markets, and a fund is probably safer than individual shares.'

Remember the under 18s cannot enter into a legally binding contract. This means they can't buy or hold assets. But parents or grandparents can pay into unit trusts or ISAs on behalf of a child. Some investment funds do allow children aged 14 to 18 to hold investments in their own name but such funds are rare.

TIPS

Set up a bare trust. This allows you to buy units in a unit trust or shares on behalf of their child. You will not control the assets or any income arising from them. Any income generated must be accumulated and it cannot be paid to or spent on behalf of the child.

Until a child reaches 18, income from investments given to the child by a parent is taxed as the parent's income, apart from the first £100 of investment income.

So you may be lumbering yourself with an added tax burden. Once the interest you earn has breached this limit, you pay tax on the whole investment. These rules are designed to stop parents using their children to avoid inheritance tax rules.

So it could be important to make the most of tax-free investments, such as National Savings Childre's Bonus Bonds or friendly society baby bonds.

Each parent can give their child investments. So a child could earn £200 in interest a year from the two investments and avoid giving their parents a tax bill. Any investment earnings higher than this will be taxed as their parents' income.

To avoid these rules, why not get a grand parent or other family member to set up the account. This way your child gets the same personal tax allowance as you would.

If a child is a non-taxpayer, then you will need to register them as non-taxpayers to get interest paid gross from savings accounts from banks and building societies. Get form R85 from the bank or building society to do this.

AUTIF has a factsheet giving advice on saving for children which can be obtained from its website or by calling 020 8207 1361.