Give children a start

All investments are about the long term; so the earlier you start the better and this is particularly true of planning to help your children. Begin when they are very young and they have the opportunity to become independent more quickly, later on.

If you start early enough, you can keep the costs down to a manageable level; and bearing in mind the expenses that most new parents face, this has to be a good thing.

There are a number of forms of investment that can be used, including Child Trust Funds (CTFs), equity based investments and, perhaps surprisingly, pensions.

Child Trust Funds are available to children born on or after 1 September 2002, who will receive a £250 government voucher to start their account. The account, which belongs to the child and can't be touched until they turn 18, offers tax free growth on the money and ensures that they will have some money to start adult life.

What makes CTFs so valuable is that parents, grandparents and others can boost the CTF by up to £1,200 each year; so with the additional £250 the government will add at age seven, each child could have a pot at 18 worth more than £22,000, even before investment growth.

CTFs can be invested in cash or equity funds, offering families the choice between a high-level of security and potentially lower growth, or less security but, especially over 18 years, the chance of greater returns. According to HM Revenue and Customs, money in equity based accounts has grown more than a similar amount left in a savings account over every 18-year period in the last 40 years.

It is also possible to set up other forms of investment for children, including bank accounts and collective share-based investments. However, equity based investments are subject to a 10% withholding tax on UK dividends (this applies within CTFs too) and interest from bank accounts is taxed at source unless form R85 is completed on behalf of the child. Any investment income in excess of £100 a year resulting from parental gifts will attract tax on the parent.

Importantly, CTFs do not create this potential tax liability.

One issue that might concern many parents is that giving any child of 18 a large sum of money could lead to them simply going off and buying a high powered motorcycle or car; with potentially dangerous consequences. There is little that can be done to prevent this and tax law on trusts makes it difficult to adopt any alternative strategy without careful planning. However, taking steps to give children a financial education – and ensuring that they understand early on that this money is intended to help them get through university, or otherwise establish themselves in life could have much wider benefits that avoiding the obvious pitfalls of combining young adults and too much money.

With an eye to the very long term, parents can set up pension schemes for their children by gifting them up to £2,808 (from 2007/8, rising to £2,880 from April 2008) which, if invested in a pension scheme will be topped up to £3,600 a year by the government. Benefits will be available to the child from age 55 in the form of a (currently) tax free lump sum of up to 25% of the total accumulated fund, plus an income for life.

If you require any further information about the services that we provide or would like to review your financial planning position, please contact us

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