Tax efficient savings for your kids

If your kids were born after 1st September 2002 you’ll hopefully already be aware of the Child Trust Fund. To clarify, a CTF is a government scheme that essentially exists to encourage saving for your children’s futures. To kick things off new parents are given £250 (£500 for low income families) to invest tax free. The savings will become available to your child when they turn 18.

Obviously this amount in itself isn’t going to produce a particularly massive windfall (an estimated 7% growth on an initial £500 investment would be worth £1,410) but the scheme also allows for further donations of up to £1,200 per year, which will also be tax-free, meaning family and friends can potentially contribute enough to make the eventual yield big enough to make a genuine difference.

There will be no restrictions on what your child can do with the money, it could contribute to further education costs or go towards a first car for instance. This early experience of real money management is perhaps part of the idea behind the scheme; indeed, children will receive relevant financial advice and education in the run up to gaining access to their money. The idea could be seen as instructive towards instilling a saving habit that might counterbalance Britain’s current over reliance on credit.

The process involved in investing a CTF is designed to be as straightforward and fool-proof as possible. Parents will receive a voucher from the government and can then invest it however they wish (within reason, nothing too high risk essentially and I’m pretty sure they won’t accept it down the bookies) although if you don’t want to invest it yourself HM Revenue and customs will invest it for you after a year. Even in this case parents will be free to assume responsibility for the account whenever they wish. However you invest the money the government will add an extra £250 (£500 for low income families) when the child reaches 7.

There are numerous ways parents might consider investing the money – savings accounts specifically designed for a Child Trust Fund such as the one offered by Asda Finance, which will allow you to either set up a regular direct debit payment or make occasional one off payments, are probably the most straightforward. You might also think about a stakeholder or shares account, which will inevitably involve more risk but with the potential of bigger gains Alliance & Lester have a useful section on savings accounts that should help you find out a bit more about the options.