News details
Finding alternatives to the Child Trust Fund
6/7/2010
Alok Dhanda explains the choices for parents who want to save for their children’s future, now that the government has abolished Child Trust Funds.
With the recent news that our new government has scrapped Child Trust Funds (CTFs), parents will now be wondering where else they can turn to, if they want to start saving for their children’s future.
Chancellor George Osborne has announced that from January 2011, CTFs will no longer be available to newborn children. At the moment, newborns receive a £250 voucher, but this will cease when the changes come into force. However, existing CTF accounts will continue to run until the children reach 18, and for expectant parents there are plenty of other options available.
Many parents and grandparents may be concerned that with the abolition of CTFs, children born in January 2011 onwards will miss out on up to £1200. In reality, there is no need to be worried, as there are many alternative products on offer for people who want to put money away for a child, to save for university or a deposit on a home.
People can invest in a child in one of two ways. If parents choose a designated account, they can retain control and access the money, but it is designated for the child. They can transfer it into their child’s name when the child is 18, or keep it in their own name. This is a common, uncomplicated route to take.
Another option, which is popular with grandparents, is investing for children through a Bare Trust. Money is held in a trust for the child and the trustees have legal control of the plan until the child is 18. Any income from a Bare Trust is taxable at a child’s rate, and a child has a tax-free personal allowance of up to £6,475 in the present tax year.
As investing in children usually involves putting money away for up to 15 or 20 years, the stock market is a good place to consider when investing in a child. Over the long term, shares are more likely to produce better returns than savings accounts. However, it is important to bear in mind that values can go down as well as up.
Parents should not to be reluctant to take a few risks with nest-egg money, as if they are overly cautious they could end up missing out on better returns. It is a good idea, rather, to go for something that gives exposure to a range of companies and sectors. This is where Unit Trusts and investment trusts come in. There are a number of investment funds specifically aimed at children, so make an appointment to see an Independent Financial Adviser who will show you the full range of options.
However, you don’t have to limit yourself to looking at products aimed only at children. An investment such as a unit trust can be held on behalf of a child, and designated with their name. Similarly, Investment Bonds can also be used to great effect, because even when a bond has grown in value after a number of years, there is potentially no tax liability if the bond is assigned to a child at a later date.
Grandparents or parents could also look at paying into a tax free ISA, whether this be Cash or Equity. Adults can pay up to £5100 into a Cash ISA and can earn up to 3% interest. This could amount to even more money if they choose to pay into an Equity ISA.
Grandparents with surplus income should consider Offshore Bonds. Up to 5% of the initial amount invested in an Offshore Bond can be withdrawn, tax free, for up to 20 years. As an added benefit, if this tax-free amount is not used in one year, it can still be rolled forward to the following year.
So, even though the government has made a drastic change by getting rid of CTFs, the alternatives have lots of potential to achieve much better returns for your children. There are so many options to choose from that it is important to sit down with an IFA and work out the best plan for you and your family.
For further information about how Alok can help you with your personal or business planning needs, contact Dhanda Financial, 52 Dean Street, Newcastle upon Tyne, NE1 1PG, telephone 0191 255 8960, or email alok@dhandafinancial.com
