MONEY Q&A: What should teenagers do with their money?

I am 13 and have pounds 600 in a National Savings investment account. I am not planning to spend the money in the next few years. Could you suggest an alternative investment strategy?

CM, Cheshire

Let's assume you want to keep your money in a deposit-type account rather than risk it on the stock market. A big issue for savers is whether to go for a variable or fixed interest rate and National Savings present you with this dilemma.

You get one of seven different variable interest rates on the National Savings investment account depending on your balance. On balances from pounds 500 to pounds 2,500 the rate is 3.65 per cent before tax. Interest is paid without deduction of tax, though tax is payable if you fall in the tax bracket. Very few people still at school are taxpayers. Most find the personal allowance of pounds 4,355 more than covers any savings or other income.

There is an alternative investment from National Savings exclusively for people under 16. It is the Children's Bonus Bond. The current Issue O pays a tax-free rate of 4.85 per cent. The rate is fixed for five years. You can cash in before the end of the five-year term but the fixed rate will be reduced to 3.5 per cent. You receive no interest if you cash in during the first year. The minimum investment is pounds 25, the maximum pounds 1,000.

Strictly speaking, Children's Bonus Bonds have to be bought by people over 16 for those under 16 but that should not be difficult for you to arrange. You can continue to hold the investment past your 16th birthday.

Compared with the National Savings Investment account, Children's Bonus Bonds may be a better option if you can tie up your money. You have to take a view on where interest rates may go next. If short-term, variable interest rates rise above the fixed-rate in the next five years you may regret going for the fixed rate.

Bear in mind, though, that's it's not just a matter of whether variable rates will rise but also of whether they will rise at a point where the net advantage over five years would be to go for a variable rate. It's a difficult one to call, but many pundits reckon we have entered a low- inflation, low-interest rate era. Far from rising, short-term, variable interest rates may have further to fall. Getting into a fixed rate now could turn out to be a smart move.

As well as considering National Savings, take a look at the selection of current Best Savings Rates on the page opposite. You will find that some of the better rates require a high minimum balance. Also, a number of banks and building societies offer accounts restricted to people under 18. You may wonder why some bother. Colourful freebies do not compensate for miserly interest rates. However, others do attempt to attract tomorrow's adults with decent rates. For example, the latest issue of MoneyFacts shows Birmingham Midshires, Bradford & Bingley, Britannia, Chesham, Coventry, Nationwide, Saffron Walden and Yorkshire building societies with variable rate accounts paying above 6 per cent on low balances.

If you want to take a risk with your money, consider a unit trust investing in shares or corporate bonds. You have enough money to invest the minimum lump sum required by many (though not all) unit trusts. In the past, stock- market investments have given the best returns over the longer term. But people are usually advised to have adequate "safe" money on deposit before considering the stock market.

After the windfall

I received Halifax windfall shares and put them in a PEP. What are the options if I want to sell the shares and hold on to the PEP status for the proceeds?

MH, Humberside

Do you want to sell the shares and get hold of the cash? If so, you simply instruct the PEP plan manager first to sell the shares and then to send you the cash proceeds.

By doing this you will close the PEP account. There will be no capital gains (or other) tax on the cash because the shares will have been sold within a tax-free PEP.

But do you want to reinvest the cash in another PEP investment? First find out what sort of PEP you have.

n If it's a "general PEP" the choice for reinvesting the money will be wide and will include shares, corporate bonds, unit trusts, investment trusts, open-ended investment companies and so on. You may be able to spread your money across more than one investment depending on what the plan manager allows.

n Some general PEPs were sold as "corporate PEPs" meaning that they were intended to hold the shares of just one company. Even though the plan manager may have designed the PEPs in that way, if they are general PEPs, under Inland Revenue rules you needn't be so restricted.

n You may, however, have what the Inland Revenue recognises as a "single company PEP". In that case, you will be restricted to reinvesting the money in the shares of one other company.

Whether you have a general or single company PEP, the PEP manager may put restrictions on how you can reinvest the money. For example, some corporate and single company PEPs are designed to hold the shares of one very specific company. That needn't be a problem, because you have the right to transfer your PEP to another plan manager.

If you think you will want to make a transfer, first decide to which plan manager you want to transfer. Then contact that plan manager and ask for advice on how to arrange the transfer. It's important to follow the correct procedure; otherwise you could accidentally lose the PEP status.

If you are transferring between managers, a single company PEP has to be transferred to another single company.

Write to the personal finance editor, Independent on Sunday, 1 Canada Square, Canary Wharf, London E14 5DL, and include a phone number; or fax 0171-293 2096; or e-mail i.berwick@independent.co.uk. We cannot give personal replies or guarantee to answer letters. We accept no legal responsibility for advice given.

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