Wealth Check: 'What is the best way to save for our children's future?'

Ricky Chawla and his wife have a six-month-old girl and another child on the way. They would like advice about how best to set aside money for their children's future, and they would like to build up a fund to pay for things such as private education.

Ricky Chawla and his wife have a six-month-old girl and another child on the way. They would like advice about how best to set aside money for their children's future, and they would like to build up a fund to pay for things such as private education.

Mrs Chawla cares for their daughter at home and Mr Chawla's regular income is quite high, but he feels he is running out of options to save in a tax-efficient way. He also wonders whether he should be topping up his pension more with larger contributions at this stage of his life. Mr Chawla shopped around for his mortgage and went with Abbey, which gave him a discounted rate for two years. He is quite happy with this arrangement, although it is up for review in August this year.

We put his case to Anna Bowes at Chase de Vere, James Dalby at Bates Investments and Tom McPhail at Hargreaves Lansdown.


Salary: About £200,000 with annual bonus.

Property: £200,000 mortgage with Abbey on £800,000 house.

Savings: £12,000 Alliance & Leicester e-savings (5.4%). £20,000 current account. £20,000 Abbey Child Savers. £3,000 Abbey postal Isa. £5,000 Abbey savings account.

Pension: £390 a month.

Monthly outgoings: Bills £150. Mortgage £2,000. Savings £500. Phones £100. Food £300. Other expenses £700.


Mr Dalby suggests the couple should be careful with regards to the tax position of the £20,000 invested in the savings account in their daughter's name. Basically, if the interest generated by capital gifted by any individual parent exceeds £100 in a year, the whole of the interest will be taxed as though it belongs to the parent. This rule does not apply to capital gifted to a child by a grandparent, or other family or friends. In that case the child is able to take advantage of their own personal income tax allowance before paying any tax on the interest.

Both children will qualify for the Child Trust Fund (CTF). In respect of their six-month-old baby they will receive a CTF £250 voucher shortly and the CTF rules also allow them to save up to a further £1,200 each year per child in a tax-efficient environment.

However, Mr Dalby says they should consider whether they still want to have some control over the accumulated capital beyond their children's 18th birthdays, when they automatically become entitled to the capital. Using the £1,200 annual allowance should not necessarily be the automatic choice.

Mr McPhail suggests for their CTF money they might want to consider HSBC's Growth and Income fund, and for educational funding Mr Chawla should choose a good broad-based fund in which to save from surplus income.


Ms Bowes says Mr Chawla appears to have all his savings in cash, which he should change unless he needs all of this capital in the near future. He could consider a Venture Capital Trust. He can get 40 per cent tax relief on this investment, so if he were to invest £10,000, he could reclaim £4,000. This is a higher-risk investment and it must be invested for a minimum of three years. In addition to this tax relief, any dividends received over the term are free from personal income tax, and any growth on encashment or maturity is free from capital gains tax.


Based on a salary of £200,000, Ms Bowes says the maximum he could be investing is 17.5 per cent of the earnings cap (£102,000) or just under £1,500 gross each month, on which he would qualify for tax relief at his marginal rate. He probably doesn't want to put this amount into an investment that he can't access until retirement, but he isn't putting away enough if they want an income remotely like the one they currently have.

They could also consider starting a Stakeholder pension for Mrs Chawla if she does not have one. Even if she is not earning, she can still invest up to £3,600 gross per year and receive basic-rate tax relief.

Mr McPhail says Mr Chawla can invest up to £3,600 a year into a pension for his daughter. The contributions can be paid net of basic-rate tax, so it will only cost him £2,808 to buy a fund worth £3,600. He could use a Stakeholder pension; Scottish Widows offers a good deal, with the option to invest in externally managed funds. Mr McPhail suggests he considers using a SIPP instead, which will give him the freedom to select from a wide range of investment funds or direct equity investments, and the charges are now comparable with investing in a Stakeholder.

Advisers' views are given for information only.

* For a free financial check-up in the Wealth Check column, write to The Independent, 191 Marsh Wall, London E14 9RS, or e-mail cash@independent.co.uk.

Independent Partners; request a free guide on NISAs from Hargreaves Lansdown

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