Cash on delivery: it's never too early to give your baby a pension
Kate Hughes looks at the savings schemes that will help your children find their feet financially
Sunday 29 June 2008
More babies are born this month than at any other time of the year. So if you have spent the past few months buying cots and prams and painting the spare room, congratulations. But you may be already feeling the financial pinch. And if you are a new parent, the bills have only just started landing.
Parents spend an average of £186,032 raising a child to the age of 21. That's around £738 a month, according to the friendly society LV=, and that figure is set to increase by 42 per cent by 2012. But many people aren't taking advantage of the range of money-saving, money-making and tax-relief schemes available that could make a big difference to the new family.
Child benefit is the basic means by which the Government helps cover some of the costs of bringing up children. Biological and adoptive parents receive £18.80 for the eldest child and £12.55 a week for each additional child, up to the age of 16 or 19 if they are in full-time education. The relevant forms are included in the "bounty packs" provided by the hospital immediately after the birth. If these go astray, you can claim online at www.hmrc.gov.uk/child-benefit/claiming.htm.
Around 90 per cent of families also qualify for child tax credit. The amount received depends on the number of children you have, your employment status and income, whether you pay for childcare, and any disabilities. For more information go to: www.hmrc. gov. uk/taxcredits/do-you-qualify.htm
If you work for at least 16 hours a week, you may also be able to claim back up to 80 per cent of your childcare costs, as long as your child is looked after by a registered carer. Go to www. hmrc.gov.uk/taxcredits/help-childcare-costs.htm for more details.
And then there are child trust funds. A CTF is a savings and investment plan for every child born on or after 1 September 2002. The Government sends out a voucher worth £250 for parents to invest in the CTF account of their choice. Parents, grandparents and friends can top up that account to the tune of £1,200 every year. The account, which belongs to the child, is tax free and can't be touched until the beneficiary turns 18.
Parents have a choice as to where to invest the £250: in a cash savings account; in a stakeholder account – which channels the money into a range of companies that fit government criteria for low-risk investment; or in a shares investment account, the riskiest choice but the one that usually offers the greatest returns long term.
If the voucher is not invested in the first 12 months, not only will your child lose the interest on that amount but the Government will randomly allocate the cash to any one on a list of available funds, making the interest rate or performance a matter of pot luck. Go to www.childtrust fund.gov.uk for more details.
If you want to save more than £1,200 a year, or your child is not eligible for a CTF because he or she was born before September 2002, a range of long-term savings plans are available on the high street. "A good way to set money aside is to calculate the child benefit being received and divert this money on a monthly basis to a plan giving as much tax efficiency and flexibility as possible," suggests Simon Hodge of independent financial advice firm Simon Hodge Financial Planning.
"NS&I offers a number of excellent alternatives which are generally tax free. Children's bonus bonds, for example, offer a reasonable rate of return: around 3.75 per cent per annum compound over five years including a bonus.
"And many high-street banks offer children's accounts, which get them into the savings habit and build up money for the future."
It may seem a distant consideration at the time, but setting up a pension for your newborn could prove very rewarding thanks to huge tax benefits and the build-up of interest over many years.
Matthew Richardson, pensions manager for price- comparison website Moneysupermarket.com, says: "All of the main pension providers offer low-cost stakeholder products for saving for a child's retirement, including Virgin Money's children's pension."
The maximum yearly contribution under the current tax rules is £2,880. To encourage pension savings, the Government will top this up with basic-rate tax relief at 20 per cent, which instantly turns that sum into £3,600.
"If the maximum contribution was made for the first 18 years of a child's life, a typical retirement pot at 65 – in today's money – would be around £318,000, based on annual growth of 7 per cent. Typically, for a male, this would generate around a £12,000 annual income," adds Mr Richardson.
But there are many other, increasingly ingenious, ways to boost your children's financial situation – such as the website Kidstart. This is a free savings club which works in the same way as an online cashback site, allowing its members to collect cash savings for children when shopping at over 200 well-known retailers and service providers, including Marks & Spencer, Asda, Dixons and British Airways.
How much you get depends on the retailer, but it can be up to 20 per cent of your normal shopping. The cash is kept in a separate, secure account where the children's profiles and savings can't seen by anyone other than the parents. Go to www.kidstart.co.uk.
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