Saving and investing for children

Children - or more accurately their parents and other doting relatives - have their own growing section of the savings and investment industry. Saving for your children makes sense when you look at the costs you might be facing.

Beyond the piggy bank

At least 73 banks and building societies offer savings accounts. The choices are limitless but some of the accounts are pretty limited offering rates as low as 0.1%. And then there are investment trusts and unit trusts targeted at young savers.

Whenever possible you should save in the child's name to avoid paying tax. Filling in Inland Revenue form R85 is crucial as that tells the taxman that the saver is a non-taxpayer and interest will be paid tax-free. Children cannot have ISAs in their name as they are only open to the over-16s so unless you fill in R85 your children will be taxed.

From high chair to high street

Savings accounts for children often come with a range of gimmicks and many have age limits. Usually a parent or guardian has to look after the account until children reach 11 but after that it is up to them. The gimmicks and free gifts range from the not especially imaginative moneyboxes at Abbey National and HSBC to book club membership at Bradford & Bingley and discount vouchers at Leeds & Holbeck.

First Trust Bank in Northern Ireland offers a teddy bear, a height chart and a birthday card for the under-3s. Once they get past three it's a t-shirt and voucher booklets. All of which is fine but not much compensation for the 0.1% rate. The same rule applies to all free gifts from banks - they are fine but parents should look at interest rates first. Low rates include Barclays which only offers 2.5% on amounts over £250 and Bank of Scotland which pays 1.5% on its instant access Express account.

Apron strings and purse strings

Often companies rely on parents and relatives using their existing bank to save for children and not shopping around. But there are decent rates out there and they are usually at firms which don't offer good gifts.

Currently the best rates, according to The Research Department, come from Nationwide, Portman, Harpenden and Loughborough Building Societies They pay between 4.6% and 4.7% but Harpenden does not allow any withdrawals until the children are 18.

And Loughborough's account is only available at branches which is not much use if you don't have a handy branch. The gifts are not great - Nationwide only manages an account welcome pack and an annual magazine. Portman and Harpenden don't give anything while Loughborough offers a moneybox and pen set plus a birthday card.

Booties and FTSE

If you are saving for the long term you can afford to take a bit of risk and that means looking to the stock market. With the market at a five-year low there theoretically is a good chance of a strong recovery. Specialist children's funds are available although you could simply invest in any good unit trust which allows regular contributions. If you can find one in the current climate of course.

The specialist funds include Aberdeen's regular savings scheme known as Thomas & Friends after Thomas the Tank Engine. Luckily it doesn't invest in Railtrack but instead puts the money in three Aberdeen funds - Global Champions, Sterling Bond and UK Blue Chip. It will accept one-off £400 lump sums.

Invesco Perpetual has its Rupert Children's Fund named after none other than Rupert the Bear. It takes minimum lump sums of £50 and regular savings of £20 a month. Savers are sent a birthday card and there's also a special Rupert section on the website (link below) called Kids' Corner. It claims to make learning about money fun for children with games and competitions although whether it will beat Tomb Raider is another debate.

Investment trusts are another possibility with Foreign & Colonial Management highlighting its own Private Investor Plan. It invests across a range of investment trusts and allows monthly investments of £50. Lump sums from £250 are also possible.

The firm also allows investors to start with a lump sum and then top it up when you can afford.

Baby bond - licenced to fill nappies

Friendly societies such as Tunbridge Wells Equitable offer a range of bonds where you invest £25 a month or £270 a year tax-free. Their bonds should be held for at least 10 years to get the maximum benefit. Tunbridge Wells calls its scheme the Baby Bond - a name Gordon Brown tried to steal for his Child Trust Fund. This scheme announced spookily enough just before last year's General Election will guarantee up to £500 for every new-born baby with additional cash invested at eight, 11 and 16. However more than a year later no further details have been released and it is unlikely to actually come into effect until 2004 at the earliest, if at all.

But the Government does allow you to save into a pension for your children. Stakeholder pension schemes can be set up for anyone and that includes new-born children. Putting £60 a month into a pension fund for 18 years would guarantee a £1 million fund by the time the child is 60 according to a 6% growth rate estimate from Legal & General. Of course £1 million won't go as far as it used to by then. But the major gripe about pensions is that we all start saving into them too late. And you couldn't be accused of that if you start one for a new-born.



Very useful article, more so considering I am now the proud father of a 3 week old daughter.

I would like to start investing for her future and am interested in the long term FTSE stocks & shares route.

The question is how many of these accounts can I open? Am I restricted for tax reasons or can I open one Thomas Tank, one Rupert Bear and a Baby Bond account??

Any advice greatfully received.

Hi Captain!  

Congratulations on the arrival of baby Cash.

In short, you can indeed open as many of those accounts as you like.  It is only ISAs that carry certain restrictions.

Best wishes


Thank you very much.

Keep up the good work, all your info is extremely useful.


Don't worry too much about cleaning up the finance board. I am just as thick as a castle wall and didn't see the article first time around. However, my dormant question did give you the opportunity to look fabulously well informed! Ta very much :-*

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