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?
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.
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).
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.
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.
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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