Tax-efficient saving and investing for children

If you thought bringing up baby was expensive then prepare yourself for the financial responsibilities of being a parent long after the rug rat stage. Putting children through university is high on the list of financial goals for UK parents. Nearly half of those surveyed for Alliance & Leicester's Wealth Tracker Index said this was a priority. The findings also show that a quarter want to open a savings account with a lump sum for their children, while 14% would like to save in order to put down a deposit on their child’s first property. All of which shows that being a parent means the planning and saving, not to mention the spending, never really stops.

There are hundreds of different saving and investment products which will help make these long term financial goals an affordable reality. Some include tax breaks but make sure you consider other aspects such as the risk profile, investment term and rates of return before deciding.

Friendly alternative

Friendly societies have been around for more than 150 years. They are mutual organisations providing a wide range of financial products including saving schemes for children, the proceeds of which are tax-free. Because of the special tax treatment they enjoy, these schemes have strict limits on how much you can contribute. The current maximum is £25 per month or £270 per year per child but you can invest from £10 per month. Around 70,000 of these schemes are taken out each year and are available to children and adults alike. The premiums are normally placed in with-profits or unit-linked funds, which typically invest in a mixture of assets including shares, property and fixed interest securities. The schemes are designed to last a minimum of 10 years so be prepared to lock the cash away as early withdrawals are likely to attract penalties and a potential tax bill.

ISA ISA baby

ISAs (Individual Savings Accounts) were introduced by the government in 1999 to replace PEPs and TESSAs. They represent one of the few tax-breaks available to savers who pay income tax. Although your child is unlikely to be a tax payer and cannot open their own ISA until they reach 16 years of age, they provide an additional savings vehicle for parents.

You have to choose the type of ISA you want each tax year (ending 5 April). You can open one maxi ISA in which you can invest up to £7,000 all in stocks and shares or split between the three components with a maximum of £3,000 in cash and £1,000 in life insurance. Alternatively, open up to three mini ISAs with up to £3,000 in one mini cash ISA, up to £3,000 in one mini shares ISA and up to £1,000 in a mini insurance ISA. But you cannot take out both a maxi ISA and a mini ISA in the same tax year, nor can you have two mini ISAs of the same type (such as two mini cash ISAs). Mini cash ISAs provide combined benefits of tax exempt interest and instant access.

Alternatively, investment trusts or shares can be held in a simple trust which has the parents as the trustees, giving them control of the share dealing, but which has the children as beneficiaries.

National assets

Nationals Savings and Investments (NS&I) is the government-backed organisation providing tax-efficient financial products. These include Children Bonus Bonds, which are five year fixed rate bonds which can be taken out for children up to the age of 16. They can be bought in £25 units up to a maximum of £1,000. Normally, if a parent gives their child money to invest, the parent is liable to tax on the interest if it comes to over £100 in any tax year, even if the child isn't a taxpayer. But with Children's Bonus Bonds the interest and bonuses are all completely free of UK Income Tax.

Even if the child starts work and becomes a taxpayer before cashing in their Bonds, they still won't have to pay tax on the interest. Money can be withdrawn early but no interest is payable if a bond is encashed within a year, and other early withdrawals do not qualify for the final bonus. NS&I also offer tax-free savings certificates and, of course, Premium Bonds.

Now and then

Of course, when the government's new tax-free Child Trust Fund takes its first breath in 2005, it hopes that more parents will prompted to tuck money away for their offspring. In the case of bank and building society accounts, you can prevent any tax being deducted from the interest on your children’s savings by completing Inland Revenue form IR85, which will register your child as a non-taxpayer. Your branch should be able to provide this form. This registration will be valid until the child reaches age 16, when they will have to re-register personally. If tax has been deducted it can be reclaimed up to six years later. You will need to contact your tax office for details.

Finally, if you have more money than you know what to do with and you have finished setting your child up for university and first home, you can even help them prepare for their retirement. It is possible to invest up to £3,600 (including tax relief) in a stakeholder pension scheme each year and the money is locked away until your child reaches 50. It could come in handy if when it is their turn to provide the financial support.
Continuing on the subject of Tax-Efficient Savings…NAAFI Financial are now pleased to introduce two new tax-exempt savings plans through the UK Armed Forces Benefit Society.

Tailored to the Military lifestyle, our products include the following features:

 Life Cover which will continue to apply even if you are deployed.
 Easy to start and even easier to save by Direct Debit.
 A dedicated call centre specially trained to deal with all your enquiries.
 Free calls from the UK, Germany and Cyprus.
 NAAFI Financial will make a small donation to SSAFA when you open up a plan.

EasySave – the easy way for adults to build a tax-free lump sum for the future:

 You can start saving from as little as £10 up to £25 a month.
 Choose how long you want to save for - between 10 and 25 years.
 You are guaranteed to get back every penny you pay in at the end only if you cash in your plan within 28 days of the end of the term.
 Your lump sum depends on investment performance and is not guaranteed. If you cash in at any time outside of the guarantee period you may get back less than you have paid in.

Better Start Child Savings Plan:

 Build a tax-free cash lump sum for your child's future.
 Save up to £25 a month for a minimum of 10 years.
 Ideal as an 18th or 21st birthday present.
 The child’s cash lump sum pay out at the end of the term depends on investment performance and is not guaranteed. The child could get back less than was paid in.
 The interest earned by the deposit based fund is not guaranteed and can vary. The valued stock market based investments can fall as well as rise and the child could get back less than is paid in.

These products are available now in NAAFI Financial branches, or you can call us and request an application pack on:
00800 85 85 84 84 (free from the UK, Germany and Cyprus) or
+44 1423 855 225 (from the rest of the world).

Enquire Online now!

NAAFI Financial is a trading style of Close Brothers Military Services which is an Introducer firm to Homeowners Friendly Society Limited, Registered and Incorporated under the Friendly Societies Act 1992, Reg.No.964F, and its wholly owned subsidiary Homeowners Investment Fund Managers Limited, Registered in England No 3224780. Both authorised and regulated by the Financial Services Authority. Homeowners Friendly Society Limited 's FSA Register number is 110072, and Homeowners Investment Fund Managers Limited's FSA Register number is 181487. You can check these on the FSA's Register by visiting the FSA's website or by contacting the FSA on 0845 606 1234. UK Armed Forces Benefit Society is a trading style of Homeowners Friendly Society Limited, Hornbeam Park Avenue, Harrogate, HG2 8XE, United Kingdom. Tel: 01423 855000 Fax: 01423 855181. Close Brothers Military Services Limited is a company part owned by Close Brothers Group Plc and NAAFI. Close Brothers Military Services, Britannia Suite, Old Sarum Park, Salisbury, Wiltshire, SP4 6ES (Registered Office). Registered in England No: 3302028.

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