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Many of you would have already read the pinkfinance
feature on gay parenting and the financial responsibilities that this
brings. (peace of mind section).
Even if you're not a gay parent yet, many of you will
have nieces, nephews and children within your extended families that you
care about. You may be considering saving a regular or lump sum amount,
thus providing a financial start for them. This money could provide a
deposit for a home, school fees or even a wedding gift.
How can you maximise any returns?
Bank Accounts
The most basic form of child savings would be a bank
or building society account. These are offered by financial institutions
as they realise that these young account holders form their future customer
base. Many offer free gifts such as cuddly toys; pop CDs for teenagers
and memberships of special savings clubs. There is a strong case for using
a deposit account, providing the interest rate is competitive. The interest
will normally be paid tax-free, however, if the original source of the
savings were from a parent, then any income above £100 would be
taxed as if it was that of the parent.
Friendly Societies
These providers offer a tax-free savings product, which
can be placed in the name of the child. Parents, Grandparents, Aunts and
Uncles pay any contributions. Unlike ISAs the plan is available to under
eighteens and includes a nominal rate of life assurance. These products
are not unlike traditional endowment savings plans. There is no regular
income produced so there is very little possibility of parents incurring
any tax bill. The cash value builds tax free, therefore benefiting the
future value. The only drawback is that the maximum monthly contribution
is £25 (£270 per annum). 
Managed Investments
If you're investing for the longer term and committing
amounts of £50 per month upwards, Unit Trusts and Investment Trusts
are a good proposition as they offer greater potential for growth than
deposit accounts. They invest into stocks and shares, which have shown
excellent past returns. You should remember that these are longer-term
investments and should be held for at least ten years. The value of these
types of investments can fall as well as rise.
Each youngster has their own Capital Gains Tax limit,
which can be offset against gains. If the investments are kept for long
enough, a tapering relief also applies. This means that it is unlikely
that tax will become payable on gains in the future. You should invest
into funds that focus on growth by reinvesting any gains. This way income
tax will be avoided on any dividends. As discussed before this is especially
important if a parent is making savings.
Stakeholder
The introduction of Stakeholder pension plans has created
a massive opportunity for parents and grandparents to plan for a child's
future. As there is no minimum age limit under the new rules £3,600
can be saved in any child's name. Until now it has not been possible for
child's savings to receive any kind of tax relief. Every £100 contributed
to a Stakeholder will be increased to £128.20. However, generous
relatives should be aware that the benefits cannot be drawn until between
ages of 50 and 75.
Examples
By taking action now, you could seriously enhance any
child's wealth. The decisions you make and the type of investment vehicle
that you use will have a large impact on the final amount they receive.
An amount of £50 per month placed into a Unit Trust for the next
eighteen years, growing at 7% per annum within a UK Equity Fund, is likely
to produce a lump sum of around £16,400.
If £50 per month is not affordable then you should
consider one of the Friendly Society Plans discussed above. An amount
of £10 per month over eighteen years is likely to yield a figure
in excess of £3,000 at 7% growth. (Tax Free).
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