How to save for my children

With the Child Trust Fund scheme set to be wound down and ended in January 2011, parents in Britain are looking for alternative ways to invest money on their children’s behalf. There are a number of methods of saving money for your children that they can then use once they turn either 18 or 21. Many of these schemes pay a good rate of interest and are free of income and capital gains tax.

Things You'll Need

• Child Trust Fund voucher
• Children's bank account

Instructions

1. Be aware that, as of May 2010, the British government has announced that it will cut back and then stop the Child Trust Fund scheme that has been running from January 2005. The scheme paid a 250 pound voucher to every child born in the UK, with another voucher arriving after their seventh birthday. Payments were double for low income families. These funds could be invested tax free in child trust fund accounts at banks and building societies with the money going to the child on the eighteenth birthday. Further payments into the account by parents and grandparents were also tax free. After the first of August 2010 no more vouchers for 7-year-olds will be issued, and vouchers for newborns will be reduced by 80 percent. After the first of January 2011 no more vouchers will be issued and you will not be able to open a new Child Trust Fund account.

2. Make payments of up to 1,200 pounds per tax year into existing Child Trust Fund accounts. Any money paid in and any interest generated will still be tax free. Pay existing vouchers into accounts before they expire and request replacements for lost vouchers at the Child Trust Fund website. Parents, family and friends can still contribute a combined total of up to 1,200 pounds per year into your child’s account without incurring income tax or capital gains tax on the fund.

3. Open a children’s saving account at a high street bank or building society. Children can earn up to 6,475 pounds in the 2010-to-2011 tax year before they have to pay any income tax. If a child’s parents pay more than 100 pounds into a children’s savings account on behalf of a child, they have to pay income tax on the interest as if it were their own money. Money paid in by grandparents is not taxed.

4. Invest in Children's Bonus Bonds from National Savings & Investments. Bonds are issued several times a year, and you can invest between 25 and 3,000 pounds per issue. Each bond pays a fixed annual interest plus a bonus every five years. The bonds are controlled by a child's legal parent or guardian up to the sixteenth birthday and can be cashed in once the child reaches 21. You can get application forms from the Post Office or on line at the NS&I website.

5. Purchase Index-linked Savings Certificates from National Savings & Investments on behalf of a child. Interest rates are guaranteed to keep pace with inflation, and all gains are tax free. You can invest between 100 and 15,000 pounds for three or five-year terms. Children under 7 need an adult to purchase the bonds on their behalf.

6. Buy Premium Bonds from National Savings & Investments in your child’s name. You can buy between 100 and 30,000 pounds of bonds. Each bond is entered into a monthly prize draw, and all winnings are tax free. The bonds must be held on behalf of a child under 16 by a parent or guardian and can be purchased by parents, grandparents and great-grandparents.

Tips & Warnings

• Choose children's saving accounts that offer a high interest rate rather than lower rates and gifts.

References

• Child Trust Fund: Replacement voucher information page
• Directgov: Children's savings schemes and accounts
• National Savings and Investments: Children's Bonus Bonds
• National Savings & Investments: Invest for a child