Saving For Children
With University costs increasing every year and house prices rising to a level that puts them out of reach for most young couples, it is understandable that parents and grand parents are concerned about savings for their children/grand-childrens future. It is always a good idea to start saving as soon as possible, and the government is giving you a helping hand to start saving with the Child Trust Fund account.
Child Trust Fund
The Child Trust Fund (CTF) is a long term savings and investment account set up by the government, and is aimed at all children living in the UK, born on or after 1st September 2002, where the parent receives child benefit for the child, and is not subject to immigration control. To get the account started, the government will send you a voucher for £250.
Key points of the CTF
- A long term savings and investment account where your child can withdraw the money when they reach age 18,
- Neither parent or child will pay tax on income or gains on the account,
- The government will make a further contribution into the account when the child is seven,
- A maximum of £1200 each year can be saved in the account by parents, family and friends,
- Money cannot be taken out of the CTF once it has been put in, until the child reaches 18.The only exception to this is if the child dies before 18, where the money would go to the parent or guardian. Provisions are also possible to release the money early for terminally ill children,
- It will not affect any benefits or Tax Credits you receive,
- Children in families receiving Child Tax Credits, with a household income below the child tax credit limit, will receive an extra payment,
- A Child Trust Fund account can be transferred to another provider at any time.
There are 3 types of account you can choose from:
Types of Account
Savings – This is the basic kind of CTF account and the most secure. Your child will get back the value of the voucher, together with any interest. The downside is after 18 years this type of account is less likely to grow as much as an account that invests in shares.
Shares – This type of account carries more risk than the basic savings account, as the money is invested in stocks and shares, where the value of your account may go down as well as up. However, over the long term, money invested in this type of investment usually does better than money invested into a savings account, as confirmed by the Governments Child Trust Fund website.
Stakeholder – Stakeholder accounts invest your child’s money in shares in a number of companies when the account is opened, but when your child is 13 the money in the account begins to be moved to lower risked investments or assets. This means that although your child’s money may not benefit if the stock market is performing well, it is protected from stock market losses as they approach their 18th birthday. You can put in extra amounts from as little as £10, and the fees for the account have been limited by the government to no more than 1.5% a year, which means the charge can be no more than £1.50 for every£100 in the account. The charges on all other types of CTF accounts are not limited in this way.
It is important that you deal with the first voucher received from the government immediately. If you do not do so within 12 months, the government will allocate your voucher to a savings provider of its choice.
Child Trust Fund – Transfers
You can transfer your account both to another provider, and to another investment type, e.g. you can move from savings to stakeholder at any time. There will be no transfer penalties for doing so, although shares type providers may charge dealing costs and stamp duty when you close them.
Other ways to save for your Child
Providers such as Banks, Building Societies and Insurance/Investment companies offer special accounts aimed at children and young people. Here is a quick summary of the main ways of saving or investing for children.
Savings Accounts – Most Banks and Building Societies offer special cash accounts aimed at children. In most cases parents can arrange for children to get interest on their savings without tax taken off, by completing Inland Revenue form R85.
Friendly Societies – Mutual organisations, which means that the people who have investments in the society, become members of the society. They can offer tax efficient savings for children, which allow you to invest up to £300 a year or £25 per month tax free. These are mainly aimed at long term savers with a minimum term of 10 years.
National Savings & Investments - See website at www.nsandi.com
Investment Funds – These are funds in which your money is pooled together with other investors. Your child cannot invest their money in shares or unit trusts, but an adult can invest for them, and add the child’s name to the account holder name. Again, mainly aimed at medium to long term investments.
Children can have a certain amount of income before they start paying tax. They are entitled to the same personal allowance as adults, so for tax year 2008/09 they can claim back the tax on their savings income, if the total taxable income is less than £5435.
