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It's not just children who should be saving

With your children facing increasing costs on life’s milestones, the earlier you can start saving for their future, the better.

There are many different ways to save and invest for the next generation, which include:

Bank accounts
National Savings & Investment Bonds
Individual Savings Accounts (ISAs)
Child Trust Funds
Stakeholder Pensions

Bank accounts

When choosing a Bank account, you should shop around to find the best interest rate. But once you’ve started an account be careful to keep a close eye on it, as good introductory rates are often left to decline quietly. Cash deposits are very low risk and would be suitable for people who are extremely risk-averse or who are not concerned about inflation.

NS & I Bonds

With National Savings and Investments’ Children’s Bonus Bonds, you can avoid paying tax on the interest earned. They can be taken out for children aged up to 16 and usually pay a fixed rate of interest for a defined period (e.g. 5 years). Investing in these government bonds is safe, tax-free, and you don’t have to watch for interest rate changes.

ISAs

ISAs are a flexible, tax-efficient way to save for your child’s future. ISAs cannot be owned by children until the age of 16, but you could use your allowance to save for them and any income or capital gains you receive will be tax-free. Mini cash ISAs provide combined benefits of tax exempt interest and instant access.

Both parents can deposit up to £3,600 each tax year (ending 5 April) in a mini cash ISA on behalf of their child. This will rise to £5,100 in 2010. Rates also tend to be more competitive than deposit accounts. From October 2009, ISA increases will apply for savers over 50 who will then be allowed to save £10,200 a year in an ISA, of which £5,100 can be saved in cash. And from April 2010 this limit will be extended to all savers, whatever their age. These details are correct as at June 09.

Children's Trust Fund

The Child Trust Fund (CTF) is a savings & investment account for children. Children born on or after 1 September 2002 will receive a £250 voucher to start their account. The account belongs to the child and can’t be touched until they turn 18. All eligible children will receive a further payment of £250 into their CTF account at age 7, with children in lower income families receiving an additional £250.

Parents have a year to open a CTF account, but if they don’t, HM Revenue and Customs will automatically open an account for the child. The idea is that, as the child grows up, parents, relatives and friends of the family top up the account by up to £1,200 per year, tax free through either regular monthly direct debits or lump sum payments that they receive on occasions such as birthdays. If you are really serious about a long-term savings plan for your child then Stakeholder pensions are something to look at.

Pension Plans

Setting up pensions for your children (or grandchildren) may sound extreme, but it could be an excellent way to take advantage of the power of compound growth. Knowing they already have a pension could save them - and you - a lot of worry. Stakeholder accounts can be topped up by cheque, standing order, direct debit or direct credit.

For non stakeholder accounts it is up to the individual providers as to how contributions can be made. While there are many different ways to go about investing for the next generation, the basic principles are very straightforward - and the surest way to reach your goal is to start investing as soon as possible. We would be more than happy to go through some of the choices with you - just give us a call.

HM Revenue and Customs practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen.

This article was taken from Seneca Reid's Autumn 2009 newsletter.

Seneca Reid Ltd is an appointed representative of Openwork Limited which is authorised and regulated by the Financial Services Authority.

The information on this website is for the use of residents of the United Kingdom only. No representations are made as to whether the information is applicable or available in any other country which may have access to it.

Openwork Limited offers insurance and investment advice on products from a limited number of product providers and advice on mortgages representative of the whole market.