Head start for the Blair babes

As the Government launches its new £500 Baby Bond, Clare Francis considers the options for parents investing on behalf of children

As part of its commitment to create a nation of savers, the Government is proposing to give every new-born baby up to £500.

As part of its commitment to create a nation of savers, the Government is proposing to give every new-born baby up to £500.

The Baby Bond, details of which were released last Thursday, will be invested in a Child Trust Fund designed to give each child an endowment that will mature at either 18 or 21 (the exact age has not yet been decided). It is proposed that a further £100 will be added on the child's fifth, 11th and 16th birthdays.

Payments are targeted at families on lower incomes, but children of wealthier parents won't miss out: they will receive £250 at birth plus a further three payments of £50 each. Parents and grandparents will be able to contribute to the fund if they wish.

In order to encourage those on lower incomes to save on behalf of their children, the Government has also announced its intention to launch a Saving Gateway, whereby it will match the contributions made by parents.

Both schemes, which are currently in the consultation stage, reflect a growing need for people to take responsibility for their own future. While it is crucial to save for retirement, it is also becoming harder for young adults to cope financially as the cost of living escalates. Consequently, an increasing number of parents are being forced to save for their children's future, to help meet the cost of higher education or to ease the financial struggle young people face when they leave home.

Those parents who begin saving from the moment their child is born have greater flexibility when deciding where to invest. There are various options available, particularly if you are planning to keep the money invested until your child, or grandchild, is at least 18. This sort of time scale is perfect for equity investments such as unit and investment trusts and open-ended investment companies (Oeics).

Ian Howe at independent financial adviser (IFA) Towry Law stresses the advantages of getting off to an early start. "There is a fantastic array of choice," he says, "and you can be as speculative or cautious as you want."

Traditionally, National Savings products have been used as savings vehicles for children. Returns are tax free but in recent years rates have dropped considerably. The National Savings Children's Bonus Bond is currently paying 4.45 per cent interest. The maximum you can invest is £1,000, and this sum cannot be accessed for five years.

Friendly Society baby bonds, such as those from Tunbridge Wells Equitable, have also been popular investment vehicles. But despite the fact that they are tax free, they are quite inflexible and charges are relatively high. Your money must be invested for a minimum of 10 years and you cannot pay in more than £25 a month.

Michael Owen, director of IFA Plan Invest, believes managed funds are a better option as returns tend to be higher. Some funds, such as the Witan Jump scheme or Invesco's Rupert Bear fund, are designed especially for children. However, while Mr Owen likes the Witan fund, which is cost effective and has a good track record, he suggests such funds may not be the best option.

Rather than opt for a fund specifically for children, Mr Owen advises parents to choose a quality fund with low charges. Donna Bradshaw, director at IFA Fiona Price & Partners, agrees.

"Don't go for gimmicks ­ go for performance," she says. "A tracker could be ideal. Charges are low and over time [these funds] are likely to perform as well, if not better than, managed funds. Alternatively, take a punt and go for higher risk by investing in something like a biotech fund. Another option would be an ethical fund, as children are likely to be interested in this and it's a good way of involving them and educating them about equities as they get older."

Parents or grandparents can set up the fund in their own name but designate it to the child, who can access the money at the age of 18 (or 14, if they invest with M&G). However, Mr Howe points out that you may not want your child to be able to access the money at 18. If you want to keep control of it, you can put it in a bespoke trust, enabling you to stipulate when you want the money to be made available and how much you want your child to have. But the downside is that you need to invest a significant sum ­ around £100,000 ­ as these trusts are expensive to set up and to run.

Another alternative is to put your children's savings in your name. "A tip for parents is to maximise their individual savings account (ISA) allowance each year and then choose how much they want to give their children and when they want to give it to them," says Ms Bradshaw.

You could also consider setting up a stakeholder pension for your child. This is a very tax-efficient way of saving and is likely to build up a significant amount of capital. However, be aware that it cannot be accessed until your child is 50.

Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at VouchedFor.co.uk

Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Recruitment Genius: Customer Service Advisor

    £15000 - £16000 per annum: Recruitment Genius: Customer Service Advisors are r...

    SThree: Trainee Recruitment Consultant

    £20000 - £25000 per annum + OTE £45K: SThree: SThree were established in 1986....

    Recruitment Genius: Compliance Manager

    £40000 - £60000 per annum: Recruitment Genius: A Compliance Manager is require...

    SThree: Talent Acquisition Consultant

    £22500 - £27000 per annum + OTE £45K: SThree: Since our inception in 1986, STh...

    Day In a Page

    John Palmer: 'Goldfinger' of British crime was murdered, say police

    Murder of the Brink’s-MAT mastermind

    'Goldfinger' of British crime's life ended in a blaze of bullets, say police
    Forget little green men - aliens will look like humans, says Cambridge University evolution expert

    Forget little green men

    Leading evolutionary biologist says aliens will look like humans
    The Real Stories of Migrant Britain: An Algerian scientist adjusts to life working in a kebab shop

    The Real Stories of Migrant Britain

    An Algerian scientist struggles to adjust to her new life working in a Scottish kebab shop
    Bodyworlds museum: Dr Gunther von Hagens has battled legal threats, Parkinson's disease, and the threat of bankruptcy

    Dying dream of Doctor Death

    Dr Gunther von Hagens has battled legal threats, Parkinson's disease, and the threat of bankruptcy
    UK heatwave: Temperature reaches 39.8 degrees on Central Line - the sweatiest place in London

    39.8 degrees recorded on Tube

    There's hot (London) and too damn hot (the Underground). Simon Usborne braved the Central line to discover what its passengers suffer
    Kitchens go hi-tech: From robot chefs to recipe-shopping apps, computerised cooking is coming

    Computerised cooking is coming

    From apps that automatically make shopping lists from your recipe books to smart ovens and robot chefs, Kevin Maney rounds up innovations to make your mouth water
    Jessie Cave interview: The Harry Potter star has published a feminist collection of cartoons

    Jessie Cave's feminist cartoons

    The Harry Potter star tells Alice Jones how a one-night stand changed her life
    Football Beyond Borders: Even the most distruptive pupils score at homework club

    Education: Football Beyond Borders

    Add football to an after-school homework club, and even the naughtiest boys can score
    10 best barbecue books

    Fire up the barbie: 10 best barbecue books

    We've got Bibles to get you grilling and smoking like a true south American pro
    Wimbledon 2015: Nick Bollettieri - Junk balls and chop and slice are only way 5ft 1in Kurumi Nara can live with Petra Kvitova’s power

    Nick Bollettieri's Wimbledon Files

    Junk balls and chop and slice are only way 5ft 1in Kurumi Nara can live with Petra Kvitova’s power
    Ron Dennis exclusive: ‘This is one of the best McLaren teams ever – we are going to do it’

    ‘This is one of the best McLaren teams ever – we are going to do it’

    Ron Dennis shrugs off a poor start to the season in an exclusive interview, and says the glory days will come back
    Seifeddine Rezgui: What motivated a shy student to kill 38 holidaymakers in Tunisia?

    Making of a killer

    What motivated a shy student to kill 38 holidaymakers in Tunisia?
    UK Heatwave: Temperatures on the tube are going to exceed the legal limit for transporting cattle

    Just when you thought your commute couldn't get any worse...

    Heatwave will see temperatures on the Tube exceed legal limit for transporting cattle
    Exclusive - The Real Stories of Migrant Britain: Swapping Bucharest for London

    The Real Stories of Migrant Britain

    Meet the man who swapped Romania for the UK in a bid to provide for his family, only to discover that the home he left behind wasn't quite what it seemed
    Cheaper energy on the way, but it's not all sunshine and rainbows

    Cheaper energy on the way, but it's not all sunshine and rainbows

    Solar power will help bring down electricity prices over the next five years, according to a new report. But it’s cheap imports of ‘dirty power’ that will lower them the most