Give them a gift they can't open

Want to put something practical in kids' stockings? Clare Francis suggests investing for their future
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The Independent Online

Letters are now being written to Father Christmas requesting a Harry Potter outfit or the latest PlayStation 2 game. But wiser children will be asking for money just in case Santa gets the order wrong.

A survey carried out by the Association of Investment Trust Companies (AITC) revealed that 44 per cent of parents feel their children get too many pres-ents at Christmas and 37 per cent would prefer them to receive some money that could be invested for the future. While most children would look to spend the cash rather than put it away, parents who want their kids to learn about money could open a savings account for them.

"Nearly a quarter of adults had a savings account set up for them when they were younger and have continued to save regularly," says Wilson Ferguson, savings manager at Yorkshire Bank. "Whereas one in three people who didn't have a savings account as a child have no savings as an adult. So it seems that getting into the savings habit as early as possible can really help people manage their money in later life."

Yorkshire Bank has just launched a children's savings account called Cybersave, though the rates aren't particularly competitive: balances up to £99 receive 2.02 per cent interest. Children with between £100 and £249 in their accounts get 2.55 per cent and rates are tiered to 3.55 per cent for balances of £1,000 or more.

Meanwhile, HSBC's Young Savers account has an interest rate of 3.5 per cent on balances over £1, NatWest pays 3.6 per cent and Lloyds TSB 3.7 per cent. It's worth shopping around, though, as there are deals with even better rates. Britannia Building Society offers a range of accounts for children that all pay 5 per cent interest. Nationwide's Smart2Save account pays 4.76 per cent, the Ladybird account from Saffron Waldon Building Society 4.69 per cent, and Alliance & Leicester's First Save 4.45 per cent.

While these accounts are ideal for Christmas and birthday money that will be spent quickly, they don't provide much growth in the long term. So parents or grandparents wanting to invest money for their child's future will need to look at alternatives.

National Savings certificates and friendly society accounts, popular options in the past, have fallen out of favour now. The latest National Savings issues are paying interest of only 3.3 per cent so aren't very competitive, though they are tax-free. Friendly societies also let you invest on a tax-free basis, but restrict you to saving £25 a month or £270 a year without incurring tax. The money is also locked away for 10 years.

Donna Bradshaw, director at independent financial adviser (IFA) Fiona Price & Partners, points out that some people still like the with-profits approach of friendly society accounts such as Tunbridge Wells Equitable's Baby Bond. In general, though, you're likely to get better returns for your child in unit or investment trusts.

Invesco Perpetual's Rupert Bear Fund, Aberdeen's Thomas the Tank Engine investment plan, Edinburgh Fund Managers' InvestIT for Children savings plan and the Witan Jump fund are all specifically designed for children. However, this does not mean they are necessarily the best funds to invest in.

"It's just a big marketing ploy," says Ms Bradshaw. "There are other funds out there which are just as good if not better than these, and I would always urge parents to look beyond the wrapper."

Michael Owen, director at IFA Plan Invest, agrees: "I'm not one for glossy packages. If you look at the Rupert and Thomas funds, they're not that stunning. If I was going for a package, I would go for Witan Jump – it has low charges and is a good solid fund."

But, Mr Owen adds, parents have the choice of any fund on the market for their children. He advises that you start with a good-quality UK fund, such as HSBC UK Growth and Income, Lion Trust First Income or Newton Income.

Ms Bradshaw says funds of funds, such as Fidelity's, can be a good choice. Or you could go for a tracker fund if you're looking to invest small sums regularly and want low charges. Philippa Gee, investment strategist at IFA Torquil Clark, views Schroder UK Equity and Credit Suisse's FTSE 100 Tracker as good starting points.

Another option is to invest in a stakeholder pension. "Some parents are looking at stakeholders because they are concerned about whether their children will have enough saved for their retirement," says Ms Gee.

Investing in a stakeholder is a very tax-efficient way of saving for your kids, but they will not be able to get hold of the money until they are 50. Many parents would prefer to build a nest egg to help cover university fees or the purchase of a first home, in which case a unit or investment trust would be a better option.

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