CHILDREN are expensive but they could be about to get even costlier. Yesterday, universities minister David Willetts strongly indicated that university tuition fees will have to rise from their current level of £3,225 a year to reduce the burden on the taxpayer. Those saving to help their children or grandchildren through university will now have to save even more money each month if they want to reduce their kids’ debt burden.
Although parents can still top up their existing accounts after 1 January 2011, government contributions to child trust funds (CTFs) are scheduled to cease entirely from 2011. New parents will have to find alternative methods of saving for their children’s future. With interest rates at all-time lows and inflation at a 19-year high of 5.3 per cent, it is safe to say that leaving your money in cash is not a wise choice.
But if you invest a small amount of money each month from the day the child is born then you can end up with a sizeable nest egg when they turn 18. According to the Hargreaves Lansdown regular savings calculator, putting away just £50 a month would give you £21,173 after 18 years, assuming an average annual growth rate of 7 per cent.
Unfortunately, the existing process for investing on behalf of a child is unnecessarily complex and lacks transparency, says Adrian Lowcock, senior investment adviser at Bestinvest, an independent financial adviser. There are essentially two routes to save on behalf of children. You can either create a designated account, which is held in an adult’s name and marked with the child’s initials, or create what is known as a bare trust. A bare trust can be more advantageous because it gains automatic recognition from the Inland Revenue whereas a designated account is recognised at its discretion.
James Frost, managing director of Witan Investment Trust, which has a low cost savings scheme specifically designed for saving for children called the Jump Savings Plan, says that while bare trusts do mitigate the effect of capital gains tax, inheritance tax and income tax, they are not entirely tax free and are nowhere near as efficient as a child trust fund. The savings plan gives exposure to the Witan Trust, which is globally diverse, and which reduces the risk.
In terms of fund selection, Darius McDermott at Chelsea Financial Services says that growth funds are ideal but income funds can be as good provided you re-invest the dividends. He adds: “You can afford to take a bit more risk on a 20-year investment, which means you can consider exposure to emerging markets.”
But saving for your children is still notoriously unclear. Many, including Bestinvest and Witan, are calling for a children’s ISA. This would be simpler and more familiar and would segregate the child’s assets. For now, it’s a case of putting that money aside.