With school and university fees rising fast and the first step on the housing ladder becoming increasingly inaccessible it is imperative to start saving for your children as soon as possible
Saving for a child's future is not new but saving earlier is becoming an imperative. With 12 million children in the UK under the age of 16, the opportunity for professional advisers to tap this market is huge, and while as a percentage of the total population this age group is decreasing, it remains a significant opportunity.
Parents have a choice. They can finance their child's future through debt, or via savings. Although not mutually exclusive strategies, the latter has distinct advantages for parents who can afford to save a little money on a regular basis to finance their children's future: to pay school or university costs, or supply the deposit for a first house or car.
The debt option is expensive as demonstrated by recent figures published by the National Union of Students, which estimates that the average student finishing a degree with a debt of £12,000.
So great is the problem that the Government is taking preventative action now for an issue that will not manifest itself for several decades to come. Specifically, two recent government changes include the relaxation of long term retirement savings legislation through the stakeholder pension and the proposed introduction of the Childs Savings Trust Fund.
Stakeholder pensions are a highly tax-efficient way for well-off parents and grandparents to save for children. However, stakeholder pensions may have low charges and can be fully flexible but the child cannot access the money until the age of 50.
Creating a portfolio for children should work on a rising scale of risk and commitment, starting with deposit-backed accounts and slowly moving towards equity-backed investments.
The foundation to children's savings is to put money into a deposit-based savings account. These accounts have improved markedly over recent years with the once derisory levels of interest being increased substantially.
If larger sums are allocated for deposit, National Savings offer tax-efficient products suitable for a child's portfolio. The Children's Bond, for example. provides a tax-free vehicle. The maximum unit holding per bond is £1,000 and a bonus is paid on the fifth anniversary. The bonds currently accrue 4.65% interest annually.
As future demand for money can only increase, equity exposure must be seriously considered. But when considering a portfolio, the rules that apply to adults are just as relevant to children, so it is vital to get the basics right first and then work on developing the portfolio.
Children have exactly the same tax allowances as adults although the clear majority are non-taxpayers, and most children will be entitled to receive any income gross.
If they have a building society account, parents or guardians should complete Inland Revenue form R85. This ensures that interest is paid without tax deducted until the 5 April following a child's 16th birthday.
There are thousands of equity-based products, but not all are suitable for children. A good entry-level for children into equity-backed investments is a children's bond from a friendly society. The societies themselves are often overlooked because of the funding limits placed on their traditional plans.
However, they do have their advantages and the ceilings placed on contributions make the products suitable for children. Currently friendly societies make over a third of all long-term children's savings with towards £17bn under management.
The investment limits are £25 per month or £270 per annum and the plan must be in force for 10 years to qualify for tax-free status. Once the tenth anniversary has been achieved, it is possible to arrange for the plan to continue for anything up to 25 years, with tax-free investment continuing right up to maturity. One bond can be allocated per child.
The tax-free growth potential offered by friendly societies can prove especially attractive when it is remembered that Isas are not available to those under 18. The bonds can also be timed to 'mature' on a special birthday ' 18 or 21 for example.
Although friendly societies provide a first base for a child's portfolio they are by no means the only solution. If there is more money available for investment there are many familiar products to select from, but there are possible tax implications.
Children cannot own Isas but they are able to own shares, unit trusts and investment trusts. However, gifting these products to children does carry a tax burden.
Income earned by a child on gifts from his or her parents need special attention: if the income generated by the gifts made by one parent to one child exceeds £100 in any one financial year, the parent is liable to tax on that income. An account that produces this income cannot be registered to pay interest gross, even if the parent's gift comprises only part of the capital.
Most commonly, the investment will be made by an adult on the child's behalf, via a designated account that allows the adult to trade, buy or sell, while ownership remains with the child for tax purposes. Most investment houses will be able to smooth the administrative path towards this sort of arrangement.
However, should gifts be made by anyone other than a parent, they will not be subject to the £100 rule. Therefore, any tax paid on income from these gifts, because they are lumped in with the parent's contribution, can be reclaimed on behalf of the child.
As for CGT, it is unlikely to be much of a problem, since children can receive gifts from their parents without liability.
Trusts also have a place in planning for the passage of wealth from one generation to the next, especially if the grandparents are keen to endow their younger relatives.
If the trust is to be set up to give effect to a bequest (trusts can be used in circumstances other than legacies), care has to be taken and legal as well as financial advice should be provided.
Financial advice for children should follow the same guidelines as for adults if real capital appreciation is required. Risk can only be taken after a suitable amount of deposit-based funds are established.
The creation of a portfolio built upon solid foundations of low equity commitment, gaining in complexity as additional funds are committed, is more relevant to today's children than ever before.
Children have a very good tax position, with specifically-designed products that generate excellent returns. In many homes across the UK, there might soon be competition as to who reads the Companies and Markets section in the FT.
Marion Poole is general secretary of the Association of Friendly Societies
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