Investing for growth: Crying all the way to the bank

CHILDREN won't thank you for setting up a savings account in their name instead of blowing the money on an Action Man or Barbie. But 10 or 15 years later, when the investment runs into thousands of pounds, they may be a touch more grateful.

Children can earn up to pounds 100 a year in interest on money given by a parent before they start having to pay tax. After that they will be taxed even though they will not have used up their personal allowance (the same as adults at pounds 4,195), and will pay it on the whole sum at the parents' highest rate of tax. The pounds 100 limit is per parent, so the limit would be pounds 200 on capital from both parents.

However, interest earned on money given by relatives such as grandparents or uncles, and even friends, is tax-free up to the child's personal allowance.

Fiona Price, an independent financial adviser, warns against sinking too much money into an investment plan when a child is born, because other children may follow and fairness may dictate that you save the same amount for them.

A traditional starting point for investment has been a National Savings Children's Bonus Bond paying 5 per cent a year. To earn this rate, you must invest the money for at least five years. The minimum investment is pounds 25 and the maximum pounds 1,000. Income earned is always tax-free.

David Bernfield, life and pension manager at Colin Ryan insurance brokers in Ipswich, directs his customers to friendly society baby bonds. Offered by many of the 300 friendly societies nationwide, including Tunbridge Wells Equitable and Family Assurance, these bonds allow you to invest a maximum pounds 25 a month or pounds 270 a year with growth free of tax.

You can either link your investment to shares or take out a with-profits bond if you wish to smooth the volatility of the markets. Mr Bernfield recommends the Tunbridge Wells Baby Bond, which can be either unit-linked or with-profits.

The with-profits bond guarantees a minimum pounds 5,457 on a pounds 25-a-month investment over 20 years, but it could be worth much more depending on growth. With 6 per cent a year growth, it would have an estimated maturity value of pounds 9,100.

Many parents see these bonds as a means of paying for university fees, but a friendly society investment won't be enough: with costs estimated at pounds 5,000 a year now, you will have to save a lot more than that to pay for your child's college education in 18 years' time.

Many banks and building societies target children with specially named deposit accounts, and many allow accounts to be opened with a low deposit. Birmingham Midshires currently pays 7.75 per cent on a minimum pounds 25 deposit with instant access on its Smartstart account, rising to 8 per cent on deposits over pounds 500. Bradford & Bingley pays 7 per cent on a minimum deposit of pounds 10.

If you hope to make a lot more than this for your child, you will have to invest on the stock market. "Most people invest until the child is at least 18," says Ms Price. "Over such a long period regular savings plans will grow impressively, and shares should ride out the ups and downs of the market."

Most fund managers run regular savings plans where you can put in a small amount and stop at any time without penalty, leaving your investment to grow. You can invest lump sums, say, on your child's birthday or at Christmas.

Edinburgh Fund Managers runs a trust called the Saving for Children Plan, with a minimum investment of pounds 20 a month. In the 10 years to October 1998, Edinburgh's figures show that a pounds 1,000 lump sum investment in the plan would be worth pounds 3,863, compared with pounds 1,901 put into the highest-rate building society.

Contacts: Birmingham Midshires, 0645 720721; Bradford & Bingley, 01274 555332; Edinburgh Fund Managers, 0800 838993; Family Assurance, 01273 724570; Flemings, 0500 500161; Homeowners Friendly Society, 01423 844000; Nationwide, 0500 302010; Tun-bridge Wells, 01892 515353.

Suggested Topics
Start your day with The Independent, sign up for daily news emails
News
Howard Marks has been diagnosed with inoperable cancer, he has announced
people
Arts and Entertainment
Benedict Cumberbatch has spoken about the lack of opportunities for black British actors in the UK
film
Voices
Winston Churchill, then prime minister, outside No 10 in June 1943
voicesA C Benson called him 'a horrid little fellow', George Orwell would have shot him, but what a giant he seems now, says DJ Taylor
News
Rowan Atkinson at the wheel of his McLaren F1 GTR sports car
people
PROMOTED VIDEO
ebooks
ebooksA year of political gossip, levity and intrigue from the sharpest pen in Westminster
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.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Tax Assistant

Negotiable: Recruitment Genius: A Tax Assistant is required to join a leading ...

Recruitment Genius: Outbound Sales Executive - OTE £25,000

£16000 - £25000 per annum: Recruitment Genius: This is an exciting opportunity...

Ashdown Group: Java Developer / J2EE Developer - Watford - £45,000 - £47,000

£45000 - £47000 per annum + bonus + benefits: Ashdown Group: Java Developer / ...

Ashdown Group: Marketing Product Manager - (Financial Services) - SW London

£35000 - £38000 per annum + Benefits: Ashdown Group: Marketing Manager - Marke...

Day In a Page

Iraq invasion 2003: The bloody warnings six wise men gave to Tony Blair as he prepared to launch poorly planned campaign

What the six wise men told Tony Blair

Months before the invasion of Iraq in 2003, experts sought to warn the PM about his plans. Here, four of them recall that day
25 years of The Independent on Sunday: The stories, the writers and the changes over the last quarter of a century

25 years of The Independent on Sunday

The stories, the writers and the changes over the last quarter of a century
Homeless Veterans appeal: 'Really caring is a dangerous emotion in this kind of work'

Homeless Veterans appeal

As head of The Soldiers' Charity, Martin Rutledge has to temper compassion with realism. He tells Chris Green how his Army career prepared him
Wu-Tang Clan and The Sexual Objects offer fans a chance to own the only copies of their latest albums

Smash hit go under the hammer

It's nice to pick up a new record once in a while, but the purchasers of two latest releases can go a step further - by buying the only copy
Geeks who rocked the world: Documentary looks back at origins of the computer-games industry

The geeks who rocked the world

A new documentary looks back at origins of the computer-games industry
Belle & Sebastian interview: Stuart Murdoch reveals how the band is taking a new direction

Belle & Sebastian is taking a new direction

Twenty years ago, Belle & Sebastian was a fey indie band from Glasgow. It still is – except today, as prime mover Stuart Murdoch admits, it has a global cult following, from Hollywood to South Korea
America: Land of the free, home of the political dynasty

America: Land of the free, home of the political dynasty

These days in the US things are pretty much stuck where they are, both in politics and society at large, says Rupert Cornwell
A graphic history of US civil rights – in comic book form

A graphic history of US civil rights – in comic book form

A veteran of the Fifties campaigns is inspiring a new generation of activists
Winston Churchill: the enigma of a British hero

Winston Churchill: the enigma of a British hero

A C Benson called him 'a horrid little fellow', George Orwell would have shot him, but what a giant he seems now, says DJ Taylor
Growing mussels: Precious freshwater shellfish are thriving in a unique green project

Growing mussels

Precious freshwater shellfish are thriving in a unique green project
Diana Krall: The jazz singer on being friends with Elton John, outer space and skiing in Dubai

Diana Krall interview

The jazz singer on being friends with Elton John, outer space and skiing in Dubai
Pinstriped for action: A glimpse of what the very rich man will be wearing this winter

Pinstriped for action

A glimpse of what the very rich man will be wearing this winter
Russell T Davies & Ben Cook: 'Our friendship flourished online. You can share some very revelatory moments at four in the morning…'

Russell T Davies & Ben Cook: How we met

'Our friendship flourished online. You can share some very revelatory moments at four in the morning…'
Bill Granger recipes: Our chef serves up his favourite Japanese dishes

Bill Granger's Japanese recipes

Stock up on mirin, soy and miso and you have the makings of everyday Japanese cuisine
Michael Calvin: How we need more Eric Cantonas to knock some sense into us

Michael Calvin's Last Word

How we need more Eric Cantonas to knock some sense into us