Investing for the children
As children start a new school term, thoughts inevitably turn to what happens when they leave school and start their adult life.
The transition is much easier with a solid financial base.
“If you are between 18 and 30, the financial challenges are stiff,” says David White, chief executive of the Children's Mutual. “Look at funding your start in life through further or higher education, starting a business, paying for driving lessons. Trying to amass the deposit on a house is really tough.”
The proceeds of child trust funds mature when children who turned seven this month or are younger reach 18. At birth, the Government makes £250 available to each child, which is topped up by another £250 on their seventh birthday. The hope is that parents and others will add their own contributions on a regular basis, to ease the way for children to move into adulthood.
“We think prior to the introduction of the child trust fund that some 15 to 18% of youngsters had some sort of long term investment made for them,” says White.
“Now we are finding that between 45 and 50% of parents with child trust funds held with us are opening a monthly direct debit at the same time, with about 8% making lump sum payments into the accounts.”
A generation of savers
White believes child trust funds also instilling financial education and a savings culture in the children, too, creating a more financially mature and responsible younger population.
The importance of regular savings was illustrated by a report just published by the Yorkshire Building Society — another leading provider of children's savings products.
It calculates that if parents put £2.70 aside each day for their children's trust funds from birth then this will pay for their offspring's university education and allow them to graduate debt free.
Equity or cash
There are three types of child trust funds: savings accounts, which earn interest; equity funds, which focus on maximising returns from equity investments; and stakeholder funds, invested in equities, but with capped management fees.
All the child trust funds on offer from the Children's Mutual are equity-based, so returns depend on the performance of the underlying shares over many years.
Parents applying for a child trust fund account online who also agree to make regular direct debit contributions are given £30 in Mothercare vouchers. Children's Mutual operates in Northern Ireland through the First Trust Bank and Lloyds.
Assuming the economy performs reasonably well over the next decade, equity products such as Children's Mutuals should provide good returns. But many parents will feel more comfortable with cash products that offer guaranteed returns.
The best of these at present is from the Hanley Economic Building Society, which offers an excellent 5% on funds – but accounts have to be opened in person and the society only has branches in Staffordshire in England.
The next best offer is from the Yorkshire Building Society, which pays 3% for the first year, including a 0.7% bonus. Its products are available direct by phone or internet or through its agency in Ballymena. But after the initial bonus period other trust fund accounts may be more competitive.
Child trust funds can be moved to different providers and this option should be considered on a regular basis.
Where parents do not nominate payments to be made into any specific child trust fund, the Government puts credits into a stakeholder account it nominates.
Ask the grandparents
Parents should not be shy about suggesting that grandparents, aunts and uncles and godparents make their own top-ups to child trust funds, to boost the benefit to the children at maturity, suggests David White. “The difference between saving for children and anything else is that there are other people who are willing to get involved,” says White.
While child trust funds are a good vehicle for investing in children, they were only established in 2002. Children aged eight and over do not, therefore, receive the public subsidy towards their future overheads. Other high interest children's savings accounts should be considered to provide a good start in adulthood.
Halifax offers a one year bond, the ‘Children's Regular Saver', which pays a substantial 6.0%. The Principality Building Society has a regular saver account in the form of a one year bond, paying 5.0%.
The best of the regular savings plans in which funds are locked-in until the child reaches 18 is offered by the Chorley Building Society, whose ‘Foxley Fund' pays 2.55% and the Harpenden Building Society's ‘18 Club', which pays 2.45%.
These are available in Northern Ireland by post or over the internet.