a to z of finance

From piggybank to portfolio

C is for children's money and credit cards: Children are entitled to an annual tax-free personal allowance just like grown-ups. Children who have savings in a bank or building society which earn less than their personal allowances should apply to the branch for a form to register as non-taxpayers and get their interest paid gross.

This is not, however, an open invitation for parents to recycle income through their children to get double tax relief. Parental consent is normally required for young children to spend their income, and if parents provide the capital, only the first pounds 100 is tax-free and anything extra is taxed as parental income.

Money given by parents in trust until the child is 18 is exempt from tax, but cannot be touched until then. Lifetime gifts from grandparents could be caught for inheritance tax, and both parents and grandparents may prefer to invest in Tessas, PEPs, or an Educational Trust to provide school fees or finance further education.

Most banks and building societies offer deposit accounts for children as young as five. Most offer free gifts such as money boxes or magazines and usually pay more attractive rates than they offer adults. Most will not levy charges on a child's account and some allow children of 13 and over to have a cash card. But interest rates are currently very low.

The National Savings movement offers children under 16 Children's Bonus Bonds, which pay 6.75 per cent tax free for sums between pounds 25 and pounds 1,000 if held for five years. Most friendly societies like Family Assurance also offer regular savings plans which are suitable for parents to open on behalf of children. Contributions can be paid monthly, half-yearly or yearly, and are invested tax-free in government securities or unit trusts. Interest is reinvested. The policy must run for 10 years, however.

Some unit trusts allow children to start investing at 14, and children can be given (but not buy) shares, investment trusts and unit trusts (but not PEPs or Tessas). Parents can use Form R40 to reclaim tax on dividends for children if the income is less than their allowance, but children cannot cash the investments until they are 18.

Credit cards: Barclaycard pioneered the credit card in the UK, 30 years ago now, followed by Access, backed by NatWest, Midland and Lloyds banks. There is now an extensive choice with American Express and most British banks and building societies offering cards.

There are several hundred affinity cards available only for recognised groups of users (the latest is Camra, the Campaign for Real Ale) and usually paying a small fee to the organisation or a charity. Most cards are affiliated either to Visa or Mastercard. All offer interest-free credit on bills paid off within a set period and charge interest on unpaid balances. Some charge an annual fee and a lower interest rate, others are fee-free and make their money from users who fail to pay off accounts regularly. Most offer perks such as Profile Points or Air Miles but interest rates are relatively high to cover bad debt risks.

American providers such as Adanta (in co-operation with Royal Bank of Scotland) and People's Bank of Connecticut have entered the British market in the past few months, offering increased competition and lower charges.

CLIFFORD GERMAN

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