Financial Gifts at Christmas

Posted in: Products Last updated: 24 Dec 2010

With maximum annual university tuition fees now at £9,000 per annum, giving your children financial gifts could be the best present they receive this Christmas. Savings products can increase in value over time and will outlast the latest iPod or Xbox.

Young people face big financial commitments

Today’s young people are likely to face some big financial commitments in the years to come and tuition fees might just be the tip of the iceberg. Family Investments research found that since 2004 the cost of living for students has risen by 28% and now stands at £718 per month. This figure is likely to increase further in the coming years. The average student leaves university with around £25,000 in debt but this will undoubtedly increase dramatically with the introduction of higher fees.

The onus is on parents more than ever, to get into a regular savings habit early to maximise the chance to save for their children’s futures.

Unlike the US where parents begin saving to meet big college bills from the outset, British parents are yet to adopt a similar ‘college savings’ mentality when it comes to university fees. But it’s not just those hoping for a place at university that need to plan ahead, the fact is that with high property prices here to stay and good mortgage rates requiring a low loan to value, young people are likely to struggle to get themselves onto the property ladder without some kind of financial ‘leg-up’.

The onus is on parents more than ever, to get into a regular savings habit early to maximise the chance to save for their children’s futures. Here, we look at the some of the options available to parents who are keen to find an alternative gift option for their children.

Child Trust Fund

Even though the scheme will end on the 31st December, parents who already have an existing account for their child can continue to contribute to it, as can friends and grandparents. Up to £1,200 can be added each year in the form of a one-off cheque or monthly payment and the savings are tax efficient.

These accounts will continue to run until the child is 18 providing a lump sum that can be used to meet costs such as higher education or a deposit for a first property. Even those children born after September 2002, who received the first CTF vouchers back in 2005 still have another ten years to accumulate a savings pot through parental contributions.

Junior ISA

Not all parents and mums-to-be will be aware that the Government is planning to introduce a replacement for the Child Trust Fund, provisionally called the Junior ISA.

The Government announced its plans for a new children’s savings account in October. The details indicate that the Junior ISA will be similar to the CTF in some ways: savings will be locked in trust until the child reaches adulthood and savings options will be available through either cash or investment routes. All returns will also be tax efficient. The key difference since the change of policy is that the Government will no longer make a contribution.

The Government has said this product won’t launch until the Autumn of 2011, but at present it is unclear what the final outcome will be. The problem is that anyone expecting a child in the New Year will struggle to know what to do to save tax efficiently for their child.

For those parents who want to start saving straight away, there are alternatives.

Friendly Society or Junior Bonds

One option is a Friendly Society bond (for example the Junior Bond) for parents who want to start a tax efficient investment with access to the stock market, but don’t want to wait for the Junior ISA. Using a Government sanctioned tax-break, parents and children get the same long-term benefit of stock market exposure and the ability to contribute on a monthly basis. The accounts have to be opened and paid into for a minimum of ten years but offer parents the ability to put small amounts of money away over an extended period for the sole benefit of their child, and all returns are tax efficient.

Children’s savings accounts

Parents can also consider putting money aside into an interest bearing children’s savings account. Banks and building societies all provide these accounts, offering various rates of interest, some offering instant access to cash while others require you to lock away money for a fixed period or need a notice period for withdrawal. While these are great for short-term savings, there is always the temptation to eat into the deposit and potentially to lose out on the benefit of having that one lump sum for when the child reaches 18. Past trends suggest that returns could be better over the longer term if locked away in a stocks and shares investment – but of course stock markets can fall as well as rise in value, and returns can never be guaranteed.

Premium bonds

Premium bonds can be purchased by anyone aged 16 or over and can be bought on behalf of under-16s by parents and grand-parents. But you will need to be prepared to invest from £100 up to £30,000. There is no set investment term and instead of paying interest, bonds are entered into monthly prize draws with a £1 million jackpot plus over a million other tax-free prizes. On average, the return for Premium Bonds tends to be 1.5pc tax-free.

Pensions for children

While pensions for children offer tax advantages, anyone who opens one needs to remember that the child won’t be able to access the money until they are 55 so this method won’t help your children with the increased tuition fees or deposit for a first home.

The key thing to remember with any savings account (or pension) is that the secret to building a decent lump sum is to get started as soon as possible – small, regular amounts paid over the long-term can produce surprising results when your child reaches adulthood.

To be attributed to Kate Moore, Head of Savings and Investment, Family Investments

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