Keiron Root explains how regular savings schemes can help you build up a substantial nest egg.

The development of the government’s Child Trust Fund (CTF) initiative has focused attention on the importance of parents and grandparents setting aside money during a child’s formative years, with the intention of providing a sizeable nest egg when they come to face the expenses of adulthood.

But the CTF is only a beginning. Many parents will want to make additional investments outside the limits of the CTF scheme, or organise a similar investment for older children born before CTFs were introduced. An effective way of doing this is to use a regular savings scheme linked to one or more investment funds.

Steady accumulation
While for most parents and other relatives, regular saving is simply the most practical way of putting money aside, there is a strong investment logic to back it up. Fund managers frequently talk about the effects of ‘pound-cost averaging’, whereby regular contributions to a savings plan build up a substantial investment fund over time at a lower average acquisition cost than would have been the case if an equivalent lump sum investment had been made when markets were near their peak levels.

Of course, the point about pound-cost averaging is that for it to work effectively there have to be several peaks and troughs in the market during the period of investment, but this underlines the fact that drip-feeding investment into the market in this way is a highly effective strategy to adopt when markets are volatile, as they currently are, with the likelihood that they will remain so for some time to come.

Units in unit trusts or shares in OEICs or investment companies cannot be held directly by a child under the age of 18, so if such a scheme is being used to invest on their behalf the investment should be held in, for example, the name of a parent, and designated with the child’s initials. Once they reach 18, the investment can be transferred directly into the name of the child.

Spreading the risks
Another powerful argument in favour of using an investment fund savings scheme is that such investments help to spread the risks. Clearly, parents and grandparents won’t want to take too much risk with a child’s nest egg as exposing this to the possibility of significant losses would defeat the object of making such savings. By using a collective investment fund, however, risk can be spread across a number of holdings. Furthermore, once the investment has reached a sufficient size, it can be further diversified across a number of different funds as well.

A good place to start is with a generalist investment trust, a closed-ended investment company with a broadly based, globally diversified investment portfolio. James Frost, marketing director of Witan Investment Services, notes that ‘Trusts like Witan are ideally suited for this kind of investment. Despite the recent market conditions, we haven’t seen the interest in this form of saving slowing. In fact, we would argue that people understand pound-cost averaging and see the current situation as a great opportunity to get into the market.’

He adds, ‘One of the trends we have noticed with our Jump children’s savings scheme is that grandparents are increasingly taking out multiple accounts. They are using their IHT gifting allowances and making gifts to several grandchildren, so that grandparents and parents are now contributing to Jump savings schemes in roughly equal numbers.’

Sherry-Ann Sweeting, marketing manager at SIT Savings Ltd, which administers savings plans linked to the Scottish Investment Trust, observes that ‘Parents want to provide their children with the best possible start to adult life, and history suggests that, over the long term, the stock market has proved to be one of the best ways to create wealth.’

She adds, ‘Research in the Barclays Capital Equity Gilt Study has shown that over any consecutive 18-year period since 1899 there is a 99 per cent probability that equities will outperform cash. By choosing to invest on a regular monthly basis, you can help to ensure that your child starts their adult life with a useful lump sum, which could be used towards a myriad of things, such as the costs of going to university, funding a gap year, helping to get on the housing ladder, buying their first car, getting married or starting up a business.’

Fit for purpose
Investment houses managing the portfolios of closed-ended investment companies have been at the forefront of developing savings schemes specifically for investment by and on behalf of children. The Association of Investment Companies (AIC) produces a free factsheet on children’s investment schemes provided by closed-ended investment companies (www.theaic.co.uk; 0800 707 707). Frequently, these are targeted versions of standard savings schemes, with specific names such as Witan’s Jump or ‘STOCKPLAN: A Flying Start’ from the Scottish Investment Trust.

Sherry-Ann Sweeting explains that this latter scheme can be used by parents wanting to invest in the stock market for their children: ‘The low costs associated with the product ensure that money invested is not eaten away by the high management charges found with some other types of investment.’

She adds, ‘STOCKPLAN: A Flying Start is a flexible, low-cost investing-for-children scheme that provides access to the professionally managed portfolio of global equities of the Scottish Investment Trust. There are no initial or annual management plan charges, other than stamp duty, at 0.5 per cent, and dealing spread, which means that the money invested goes further and is not eaten up by costs.’

Sweeting points out that the scheme ‘has flexible payment options so that monthly payments – minimum £25 – can be stopped and restarted at any time, while lump sums can also be invested (subject to a minimum of £250). There is no minimum withdrawal amount and withdrawals can be made at any time, with a withdrawal fee of just £10 plus VAT.’

Checking the details
Such features are fairly typical of investment company-based savings schemes. However, no two children’s savings plans are exactly the same, so it is also worth comparing the enhancements and special features attached to particular schemes.

Investment company-based savings schemes automatically reinvest dividends as a matter of course. Similarly, the schemes based on these closed-ended investment vehicles do not levy any plan management charges, either as initial commissions or as an annual management fee – rather, they make transaction charges when shares are bought and/or sold (see table for details). Most will also issue regular statements of the value of the savings plan, usually twice a year.

Aberdeen Asset Managers’ scheme offers both designated and bare trust options, as do Bluehone Investors, Dunedin, F&C Management, Graphite Capital, J.P. Morgan Asset Management, NVM Private Equity, New City Investment and SVM.

Other ‘bells and whistles’ can include a share exchange facility (Aberdeen, Alliance Trust, Dunedin, NVM Private Equity and New City Investment), while F&C Management enables its children’s savings plan to be managed online, and the Scottish Investment Trust, SVM and Witan are increasingly promoting online access to their schemes.

F&C is also rare among fund management houses in offering a dedicated Child Trust Fund, which also applies to Bluehone Investors and Graphite Capital Management (which use the F&C children’s savings scheme). Witan’s Jump children’s scheme also has a CTF option.

Most savings schemes will restrict investment to those funds managed by the sponsoring company, but the plan operated by Alliance Trust Savings is a version of its savings scheme, which gives investors access to a full range of investment companies, OEICs and unit trusts, UK-listed shares, fixed-interest securities and ETFs, as well as a cash deposit facility.

Strategic decisions
Alternatively, you could direct your child’s portfolio towards open-ended investment funds – unit trusts or OEICs (open-ended investment companies). The choice offered by such vehicles is even broader than for closed-ended funds, enabling parents to adopt a wider range of investment strategies.

However, such choice also means that portfolios have to be monitored carefully, so that risks can be controlled as the time when the child will want to make use of their nest egg approaches. This may involve adopting ‘lifestyling’, where there is, for example, a higher weighting towards specialist equity funds in the early years, moving more heavily towards bonds and other lower-risk investments as the investment (and the child) nears maturity.

In general, fund management houses providing open-ended funds don’t provide schemes targeted specifically at saving by, or on behalf of, children. However, the vast majority will provide some form of general savings schemes, with minimum monthly investment levels significantly lower than those applying to lump sum investments in their funds.

These schemes can be used in a similar way to the investment company savings plans to make regular investments on a child’s behalf and they usually enable switches between funds managed by the same group at discounted rates.