Regular savings: From little acorns...

Some tips on how to invest in a child's future

"Tell anyone and I'll kill you. Dead," Judy warned as she broke the news that with three months to go before her "top secret" 40th birthday, she was soon to become a grandmother, courtesy of her 19-year-old, daughter Abigail, a second-year chemistry student.

That was back in January. Now, as she prepares for "grandma's first Christmas", Judy has discovered that she is the envy of several friends. And she has switched her attention from hiding her age and status to providing for the child's financial future.

She has already decided that Children's Bonus Bonds from National Savings will make an ideal stocking filler.

These bonds can be bought by anyone over 16 for children under 16. They pay a set rate of interest for every five years they are held, and can continue until the child's 21st birthday. The current issue guarantees 6.75 per cent a year tax-free for the next five years but they must be held for the full five-year period to receive the guaranteed rate, and the interest is only received when the bond is cashed in.

The minimum amount that can be invested in Children's Bonds is pounds 25 and the maximum holding in any issue is pounds 1,000 - so Judy plans to buy pounds 100- worth as an initial Christmas gift, and then "pounds 50 a month or so until I reach the maximum - by which time there will probably be another issue".

Early in the New Year she also plans to sit down with her daughter and financial adviser to work out a painless way to save for the child's higher education.

When Judy herself was a student, going into higher education was largely a matter of living on a student grant. Not any more. The student grant has shrunk virtually to insignificance and most parents need to make a financial contribution to their children's 18-plus education.

But the size of the bill will come as a shock. Recent research for Barclays by BMRB shows that 93 per cent of parents who think that their children might go on to higher education are planning to help them pay their way, but most underestimate the cost.

Some 52 per cent of parents believed the cost would be less than pounds 12,000, when a more realistic estimate would be more than pounds 17,000 for a typical three-year course.

Whichever party wins the next election, parents are likely to have to dig deeper into their pockets in future if their children are not going to graduate with debts of thousands of pounds.

According to the National Union of Students, the average student owes around pounds 3,000. Almost 88 per cent of students are in debt by the end of their third year and 40 per cent have jobs during term time.

To alert parents to the costs of putting their children through higher education, Barclays has produced a free guide, Give Them the Chance to Succeed. It gives details of student grants and loans and what students might be able to earn. It also provides a ready reckoner to help parents work out how much their child will need.

Barclays illustrates the value of long-term saving for higher education by pointing out that parents who had children in 1980 and invested the monthly child benefit - when it was pounds 19 a month - in the Barclays Unicorn General Trust and continued until today (benefit pounds 43.20 a month) would now have a lump sum of pounds 18,385 which they could use to help fund their teenager's education.

Today there are more ways than ever to save for education - and many of them can get a helping hand from the taxman.

If you invest in a Tessa (a Tax-Exempt Savings Account, operated by all the banks and building societies) the interest is tax-free - provided you leave the money intact for five years.

Another option would be a PEP, a Personal Equity Plan, in which your savings are channelled into investments such as unit trusts or directly in shares. You can put up to pounds 6,000 a year into a PEP, and both the growth in the capital and the income from dividends are tax-free.

As the events of the last week have underlined, you must remember that stock-market-related investments are not as safe as a savings account, and their value will fluctuate.

But consider this: if PEPs had been available back in 1980, the investment of child benefit illustrated above would today be worth more than pounds 20,000, rather than pounds 18,000 - compared with less than pounds 9,000 from a basic savings account. K W