Best Interest on Savings for our Child

united4ever

We've got a one year old son and decided when he was born to put £100 a month away for him for things like University, School Trips etc. He's now 18 months and this money is sitting in an old current account we never used earning paltry interest. Put simply, where should we put this money to get the best return?

I'm probably not going to be so on the ball over the next 18 years to be opening and closing accounts every few months to get a slightly better deal but maybe once every year or two I could do this kind of switch.

We also put £30 a month into a child trust fund locked until he is £18.

Reaper

As you will have noticed savings accounts pay poor returns and currently most fail to keep up with inflation.

You may not have considered this but over the long term (and being for a child it is for the long term) investments ought to give a better return than savings, even after including regular stock market crashes.

I chose to put the money with an Investment Trust company, there are several who are good for childrens accounts making the whole processes straight forward. If you want to go that route I can tell you more.

If not you will just have to accept you are going to have to regularly move the money around between savings accounts. You could start by reading the Children's Savings article on this site.

chris_m

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united4ever

Reaper wrote: »

As you will have noticed savings accounts pay poor returns and currently most fail to keep up with inflation.

You may not have considered this but over the long term (and being for a child it is for the long term) investments ought to give a better return than savings, even after including regular stock market crashes.

I chose to put the money with an Investment Trust company, there are several who are good for childrens accounts making the whole processes straight forward. If you want to go that route I can tell you more.

If not you will just have to accept you are going to have to regularly move the money around between savings accounts. You could start by reading the Children's Savings article on this site.

Thanks for the reply, I nderstand over 18 years or so I should be able to get more than a savings account with only very limited risk. I would like to hear more about the investment Trust route you mentioned. Is this similar to a CTF with the childrens mutual for example?

Reaper

united4ever wrote: »

I would like to hear more about the investment Trust route you mentioned. Is this similar to a CTF with the childrens mutual for example?

Similar. But different!
Basically you are putting the money into a pool along with everybody elses money and a fund manager chooses how to invest it all.
The first thing you have to decide is how to set it up:
A designated account: This is really just an account for you which is intended to be handed over to the child in the future. Very flexible BUT it is taxed as if it is your own money - which it is. [Actually there is some disagreement over this. Some companies such as Jump seem to think the tax man will also treat a designated account as if it is the child's. I couldn't get any sensible answers out of the tax man when I asked so I thought it safest to assume the worst].
A bare trust: This time the account is owned by the child. That means it is taxed as their money and uses their tax allowances (BUT see tax below). You will appoint trustees (such as yourselves) who will make any decisions on behalf of the child until they grow up and take control themselves. Once you have put money in it is the child's so you won't be able to change your mind and get it back to buy a new car!
Other types of trust: There are other forms of more complicated trusts but I won't go into them now. A bare trust is as far as most people need to go and has the added benefit that most investment companies will set it up for you so there is no need to involve a solicitor.
Stocks & shares ISA: A final option is not to even designate it. Just open a Stocks & Shares ISAs in your own name and put an (adult) Invstement Trust in that. If you also have a cash ISA you are limited to adding an additional £5100 to a S&S ISA each year. If you don't have a cash ISA you can add more. This avoids most tax issues. Before you ask children can't have ISAs in their own names.

Charges: Investment trust charges are generally low but it takes some rooting about to discover what the different components are. The best thing to look for in the documentation is an illustration showing how it reduces the growth. So it might say "The effect of all charges would be to reduce a growth of 7% to 6%". That's the best way to compare different offerings.

Tax: OK, take a deep breath. CTFs are simple because no other taxes apply. S&S ISAs are also pretty simple as only inheritance tax might apply. As for the rest...
Let's start with income tax. There is a nasty little rule that says if parents contribute to a child's savings or investments then as soon as they earn more than £100 in interest they have to pay tax on it all as if it was the parents money (even with a Bare Trust). Note this does not apply to other relatives giving money. Note this applies to ordinary savings accounts too. In fact it is worse for them because all of their growth is from interest, wheras much of the Investment's gains will be from capital growth instead. Now capital growth is also taxable under Capital Gains tax, but every person has an annual allowance, even children.

If you go for the ISA option or the designated account option you will be gifting the child all the money at the end. Just be aware if you die before that or within 7 years of it ending the government might grab some of it back in the form of inheritance tax.

That's a brief explanation. The investment companies brochures will explain it in more detail. Here are a couple of examples:
Baillie Gifford
Foreign & Colonial