The Best Children's Savings and Investments
High Savings Interest and Tax-Free Savings for Kids
Mar 13, 2009
At 0.5%, low interest rates are negatively affecting all savers. This is the lowest interest rates have been in 315 years, so children's savings aren't currently keeping pace with the rate of inflation. However, it is important to remember that this position will change in a few years time.
The main benefits of investing early in life is that kids benefit from tax-free savings and all interest is compounded over time. The proceeds of children's savings or Child Trust Funds can be useful later on in life for a house deposit or to cover rising university costs.
Government Child Trust Funds
Every child born after September 1, 2002 is entitled to a Child Trust Fund voucher for £250. The proceeds can be invested in a deposit account, stock market, or stakeholder Child Trust Fund. Families on low incomes are assisted by a further £250 Child Trust Fund voucher at age 7. A parent can top-up this sum with up to £1200 per annum, creating a useful source of tax-free savings for the child's future.
Choosing the "stakeholder" Child Trust Fund option appears to be the sensible option, as management charges are capped at 1.5%. It provides the best aspects of both a deposit account and a stock market investment. Steps are taken to move children's savings from higher growth stock market investments into a deposit account prior to the funds maturation when the child reaches 18.
Children's Savings Accounts
Under current Inland Revenue rules, all money invested for the future of children constitutes tax-free savings. Banks cater to this demand by offering accounts suitable for children's savings. This isn't because they are philanthropic organisations, it is because market research shows that a child that opens a bank account tends to stay with them throughout adult life.
The Halifax Children's Regular Saver currently offers 8% interest on children's savings, despite falling interest rates. To benefit from this favourable rate of savings interest, it is necessary to pay between £10 and £100 into the account each month for the full 12 month term.
Once the 12 month term has elapsed, it is a sensible idea to top-up the Child Trust Fund with the proceeds. This stops a child talking the parent into withdrawing the funds for new toys. No withdrawals can be made from a Child Trust Fund until the age of 18.
Children's savings should be invested in a Child Trust Fund for the long term, preferably with a stock market bias. Take advantage of the generous rate of interest offered by the Halifax to give a Child Trust Fund some early momentum. Set up a current account with the child's pocket money to get them into the habit of saving for things they want.
Adult savers who found this article useful may be interested in reading about securing higher returns from a stocks and shares ISA or deciding whether a cash ISA or savings account is preferable.
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