Jenny Lowe looks at the options for parents who want to keep their investment risks under control

As parents, it is natural to want to do everything you can to protect your children, from testing the temperature of milk with your wrist or bathwater with your elbow through to making sure they are eating properly long after they have flown the nest.

Choosing the most suitable home for your child’s savings is no different, and your decisions will depend on a number of things – how much you want to save, whether you can commit to regular saving and, most importantly, how much risk you are willing to take. The general rule of thumb, however, is that the longer you can save for, the more your money will grow, and when saving for a child time is definitely on your side.

Standing firm
History shows that investing in the stock market is one of the best ways to generate wealth. However, given the recent volatility and the risk associated with this form of investing, it is understandable that many shy away from it.

James Saunders Watson, head of investment trust sales and marketing at JPMorgan Asset Management, comments, ‘The recent news about global market volatility is a timely reminder that investors are generally better off investing on a monthly basis rather than through lump sums on an ad hoc basis. Markets do rise and fall, so a parent who puts away from as little as £50 a month for their offspring – or less than the cost of a cup of coffee each day – will not have to worry about trying to time the market, especially in an unstable period.’

Investment vehicles such as unit trusts, open-ended investment companies (OEICs) and investment trusts are popular with those who want to invest on behalf of a child, including extended family such as aunts and uncles or grandparents.

Children can’t hold these products themselves until they turn 18, but an adult can open one and add the child’s initials to the account holder name, the assets then being transferred to the child on their 18th birthday.

‘Investment trust savings scheme charges tend to be very low, especially those aimed at investing for children,’ says Sherry-Ann Sweeting, marketing manager at The Scottish Investment Trust Plc. ‘Children’s investment plans are offered by a number of companies, including Alliance Trust, Baillie Gifford, F&C, Witan and The Scottish Investment Trust. They typically have no initial or annual charges and allow designated plans or, more formally, bare trusts to be set up at no extra cost.’

Growing popularity
And as Kate Baker, head of savings and investments at Family Investments, points out, these products are becoming more and more popular: ‘Grandparents and parents often prefer to put money into a children’s unit trust simply because they retain control until the child reaches the age of 18.

‘The advantage of using these products is that there is no upper limit, so you invest a mixture of regular premiums and one-off lump sums. And because it is invested on behalf of the child, any income or growth is regarded as the child’s for tax purposes.’

Children have the same personal tax allowance that adults have – currently £6,035 for the 2008/09 tax year. However, to prevent parents from simply dumping their savings into a children’s account, the taxman introduced the £100 rule. This basically means that if you invest on behalf of your child, once they start making more than £100 in interest, it is taxed as yours.

The £100 limit doesn’t apply if the gift comes from anyone else. This means that if friends and family members want to deposit a gift into your children’s accounts, it does not affect your, or your children’s, taxable allowances. The one thing you must remember is to fill out the HM Revenue & Customs form R85. This will allow your children’s savings to be tax free. If you don’t complete this form, your children could be losing thousands of pounds to HMRC.

Managing the risks
If you believe these stock market-linked investment vehicles to be too risky, then there are other options that will keep any worries at bay.

First and foremost is the Child Trust Fund (CTF), which was introduced by the government in April 2005 as a long-term savings account for children. Under this initiative, children born on or after 1 September 2002 are eligible to receive £250 for their parents to invest on their behalf, or £500 for lower-income families. Once the voucher has been invested, parents and relatives can top up the account to a maximum of £1,200 per year.
A tax-free and low-risk alternative for those children who are too old to qualify for the CTF, or for those who want to invest more that the £1,200 limit, are Children’s Bonus Bonds, available from National Savings and Investments (NS&I).

Up to £3,000 can be invested for a child in each issue of the bonds through regular payments of £25. NS&I issues a new bond whenever the Bank of England changes the base rate, with a fixed rate reflecting the underlying rate. The bonds earn interest
over a five-year period at a fixed rate, and on the fifth anniversary NS&I will add a bonus, which is fixed and guaranteed from the outset.

While these investment vehicles have the benefit of being backed by the government, the disadvantage of investing in Children’s Bonus Bonds is that the best rates are generally retained for those who are able to leave their money invested and untouched for five years, so you must be willing to have the cash tied up for a while.

However, if you are willing to squirrel the cash away for the long-term – say ten years or more – then you will probably find that you have access to much better rates from commercial products, such as the children’s savings plans offered by friendly societies. For example, if a child who was aged five ten years ago had taken out a Scottish Friendly Child Bond at that time, their savings would have grown to £3,920, compared with £3,301 if they had saved the money with a Building Society.

And building societies, such as Chorley & District or Harpenden, which offer savings accounts that are only accessible when the child turns 18, currently have rates of 6.75
per cent and 5.68 per cent respectively.

Easier access, greater control
To avoid having the money tied up for a certain period of time, many banks and building societies offer special accounts for children of a certain age – ranging from birth to 24 years – which often come with higher rates of interest than standard accounts. Chelsea Building Society’s Ready Steady Save account, for example, offers a rate of 5.45 per cent and Halifax’s Save4it account offers 5.05 per cent.

However, they also try to entice you with short-term higher rates, bonus rates, money boxes, height charts, colourful stickers or whatever it takes to get you to sign up to their savings account.

The important thing is to look beyond the gimmicks. Your main concern when looking for the best deals for your children’s savings accounts should be interest rates. After all, a complementary piggy bank worth £3 is insignificant compared with the substantial nest egg you will hopefully save for your children’s future.

Parents could also consider the benefits of saving under their own name. This brings with it a number of advantages, the biggest one being ultimate control of the money, eliminating the danger of having to hand over a potentially large sum of cash to a child with a habit to spend.

You also have the ability to invest in products that aren’t available for children, such as cash individual savings accounts (ISAs). The attraction of taking out an ISA is that the proceeds are tax free. Investments held within an ISA are not liable for capital gains tax, nor do any dividends you receive from them have to appear on your income tax form. There is, however, a limit to how much money you can put in, which is capped at £7,200 – with a maximum of £3,600 held in cash – for the 2008/09 tax year.

Kate Baker believes that ‘Part of being a good parent is to save for your children’s future, to give them a better start in life. There is always that desire to give your child a better start than perhaps you had, and the advantage with child savings is that you have got at least 18 years to worry about it.’