Child Trust Funds (CTF) are no longer an option for parents - aside from those who previously opened them - as the government pulled its contribution to the scheme on January 1st and all those born on or after this date will not be eligible to open one. Parents with offspring who were eligible for a CTF investment will still be able to make contributions and their child will be able to access the money saved on their 18th birthday. It might be worthwhile giving consideration to some of the alternatives on offer in terms of saving for kids.
ISAs
ISAs may be worth considering as a savings method thanks to the chance to beat the taxman. A yearly allowance of £5,100 is on offer tax-free and further information on this type of investment is available at Know Your Money - click here to read more. ISAs could also prove to be a good way of achieving a reasonable rate in the short-term until further information is revealed about a new way of saving for children.
Although ISAs cannot be owned by children, many parents may choose to invest in their own names but earmark the investment for their offspring. The children have no right to the investment and parents have no obligation to pass on the investment, offering a little flexibility.
Junior ISAs
Those who are willing to wait a while longer before plumping for a long-term investment option could be interested in Junior ISAs, which have been created by the government as a replacement for CTFs and are due to be launched in autumn this year. Tax-free incentives will be on offer, however, unlike CTFs no government money will be provided to kickstart the fund. Full details such as the limit for contributions each year are not yet known about Junior ISAs but it has been confirmed those born from January 1st 2011 onwards will be eligible.
Junior bonds
Bonds are a long-term regular savings plan and there are currently a huge range of them on the market aimed at the post-Child Trust Fund market.
The idea is that parents contribute to the bond 'little and often' by depositing between £15 and £25 each month. Returns are described as 'tax efficient' providing the payments are maintained for at least ten years.
Saving regularly over the long term, for example until a child's 18th, 21st or 25th birthday, means they could receive a lump sum when they need it, which may prove perfect for helping towards things like their first car, setting up home or funding further education.
One thing that may be worth considering is that this is a long-term plan and requires people to save regularly for a minimum of ten years. Once started the monthly contributions are fixed and cannot be changed or stopped and those who decide to cash the plan in early will probably get back less than what they paid in. Because the plan invests in shares, its value can fall as well as rise, so the final value may be less than paid in for this reason.
However, it does provide several positives, such as at the end of the term, the saver's child can decide to extend the payment term for ten years, stop the payments and leave the money invested, or take some or all of the money.
A plan for a child can be opened by anyone, whether a parent, grandparent or family friend. The plan owner can decide when a child gets the money, on their 18th, 21st or 25th birthday.
Government-backed bonds
Tax-free children's bonus bonds, such as those offered by National Savings & Investments (NS&I), offers a five-year investments which earns interest annually. In addition to this, a bonus is paid after the five years. New versions of these bonds are regularly released by NS&I.
Children's unit trust
Another option that could be worth considering is the Children's Unit Trust, which allows for savings over the medium to long term. This plan is held in trust for a young person until they reach the age of 18 and, as a trustee, the investor stays in control of the money until then.
There are a number of options of how to pay into the plan, one of these could be to start with a minimum lump sum of £250, which can then be topped-up with payments of £50 as and when the person wishes.
Alternatively, paying regularly by investing as little as £30 a month by Direct Debit is an option and people are still free to add lump sum payments at any time. There is no upper limit on the amount that can be invested so friends, family or godparents can make contributions too. It is a stock market based investment and as such needs some consideration.
For further information on Unit Trusts click here.
Children's savings account
A simple option for saving is a children's account. This method benefits from being uncomplicated and also there is minimal risk attached. As an additional bonus, as the child grows they can use the account themselves and this may also serve to teach them about how money works and how to budget.
Accounts paying higher rates of interest are available but often these are only open for one year, or a limited period. Longer-term accounts tend to pay interest at much lower rates, which are typically under one per cent at present.
Click here to compare children’s savings accounts on Know Your Money.
Author: KYM Editor
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