Child Trust Funds (CTFs) are being phased out by the government from January 2011, and the sum automatically paid to newborns has already dropped to £50 for most babies. So what are your options if you’re looking to save for your children now CTFs are winding down?
First and foremost, make sure you still take advantage of the CTF scheme by investing any vouchers you receive between now and the New Year. ‘Essentially,’ says Which? Money expert Ian Robinson, ‘this is free money. So it’s important to make the most of it.’ (Read our Child Trust Funds guide to find out more about how they work, and check out the Which? Child Trust Funds review to compare accounts.)
However, there are plenty of other ways you can save for your children or grandchildren – and you’ll need to consider these once CTFs are gone. We’ve come up with seven smart tips that should help you get started.
1. Open a children’s savings account
Children’s savings accounts work in a similar way to normal savings accounts, with kids aged up to 16 or 18 eligible to hold them. Unlike with CTFs, money can be withdrawn from children’s savings accounts at any time – but unfortunately, the interest earned on children’s savings is taxed.
Visit the Which? Children’s savings accounts review for details of the latest Best Rate deal.
2. Start investing
You can buy investments for children and hold them on their behalf until they are 18, at which point the money is transferred to them. One way of doing this is to ‘designate’ the
investment to your child.
However, any income from the investments of over £100 a year will be taxable at the parent’s rate of tax. Alternatively, investments can be held in a trust (see below for more information).
If you’ve never invested before, check out our Beginner’s guide to investing for expert advice on getting started.
3. Put savings under a trust
You can put savings under a simple trust called a ‘bare’ trust. This means the money is held for the child’s benefit but won’t become payable until they are 18.
Any income to a bare trust is usually treated as the child’s – which means that unless they have income of more than the personal allowance, there will be no tax to pay on interest from savings. Meanwhile, only 10% tax will be payable on dividends or unit trust distributions.
4. Start a child pension
If you’re thinking of taking a very long-term approach, you could take out a pension policy on behalf of your child and pay in regular amounts. You can make a maximum contribution of £3,600 each tax year.
Although this is a tax-efficient way to save, your child will need to be 55 before they can take out any of the money.
5. Join a Friendly Society
Friendly Societies are member-owned institutions that offer tax-exempt savings plans, which may suit people looking to make smaller-scale savings. With many friendly societies, you can contribute up to £25 a month or £270 a year tax-free for a child.
The money needs to be invested for a minimum of 10 years and a maximum of 25 years. Children who are too old for a CTF should qualify for these plans.
6. Buy your child some premium bonds
Premium bonds can be bought on behalf of a child under 16. Although the investment you make won’t accrue any interest, the bonds are entered into a prize draw with a range of cash prizes paid out each month.
On the plus side, any winnings are tax-free and your initial investment is guaranteed by HM Treasury. However, there’s no guarantee your winnings will beat the rate of inflation – or that you’ll win anything at all.
For more information, read the Which? Premium bonds advice guide.
7. Open a children’s bonus bond
NS&I offer tax-free children’s bonus bonds. These are held for a term of five years, earning interest each year and paying out a bonus at the end of this period. Issue 34 – the version of the product currently available – pays 2.5%, with a maximum investment of £3,000.
However, locking your money away for five years could mean you miss out should better rates become available in future. Children can access money held in NS&I children’s bonus bonds at 16.
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