Q&A with Barclays savings expert Andy Gray
As part of Barclays' drive to offer Mumsnetters tips and advice on everything finance-related, we were joined in September 2011 (figures as of 6 April 2012) by their savings expert Andy Gray for a Q&A session on the best ways to save for your children's future.
Go to the Barclays on Mumsnet homepage for more work and family finance tips.
StarfishM: Who offers the best interest rate for monthly contributions for a long-term savings account?
Andy: It's difficult to recommend a provider, simply because rates are constantly changing, as well as the terms and conditions that apply to the accounts. A good place to start to compare savings accounts are the 'best buy' tables in the finance section of the Sunday papers, or online comparison websites offer you a way to compare the different rates and account features.
If you are looking at long-term options, accounts offer greater potential for a better rate on your savings if you are able to lock your money away.
In terms of what best meets your needs, this will depend on individual circumstances and you may wish to seek independent financial advice to help determine the most appropriate solution.
NormaSnorks: Can you clarify that money given to a child by parents can earn £100 of interest for a child, but after that, it's taxed at the parent's marginal rate of tax?
Also, does Child Benefit (while it's still around) count as money from the parent? And how should one keep records of how much money is given by extended family and friends into a child's account?
Andy: It is vital parents ensure their children are not losing out on existing tax breaks on their accounts. When opening an account for children, fill in form R85 - available from banks and building societies - so interest is paid before tax is deducted.
Children have their own personal tax allowance (£8,105) but they can earn only £100 interest from money given by each parent before they have to pay tax. Once the interest breaches this limit, tax is paid at the parent's highest rate of tax. An advantage of a Junior ISA is that no tax is payable by parents on the income generated by money they have paid into a Junior ISA, even where that income exceeds the £100 limit.
Child benefit payments would count as money received from the parent, as it is paid to the parent originally. However, the £100 limit only applies to parents and stepparents. Relatives can give as much as they like to your child or other people's children - the interest won't be taxed as your income. However, the children may be eligible to pay Inheritance Tax on the amount they receive and pay tax on interest from the income of their savings. For more details on Taxes, head to direct.gov.uk.
NormaSnorks: What's the best way to drip feed money into equities for a child - do you need a trust fund? And what's the best way to avoid having the returns eaten up by the fees?
Andy: If you have already opened a Child Trust Fund for your child, you can add to this regularly - if not the new Junior ISA will be another 'drip-feed' option. Some providers may offer special rates for their regular contribution options.
Equity-based investments tend to have management fees associated with them but there are low-cost options available. The level of fees tends to coincide with the level of active management, so a more hands-on fund manager tends to charge higher fees. As with all investments, the level of returns is not guaranteed and more active management will not always produce greater returns.
For more information on investment options, head to the Investments section on the Barclays website.
BumptiousandBustly: What is the best way to save for my two children, but still keep it in mine and my husband's names so that we control when they access it (ie so they don't automatically gain control when they turn 18)?
Andy: There are a number of options open to you - allowing you to maintain control of the savings you set aside for your children.
You could open saving accounts in your names but allocate them to your children's futures. You will have to approve any access or withdrawals, and the accounts will be your responsibility.
Or, you could open an account that names both you and children as account-holders, giving you joint access. This option allows the children to see the account and as they get older, start to take responsibility for their savings, and hopefully contribute to them.
Alternatively, you could speak to your solicitor about setting up a specific trust fund for your children. This way you can manage access based on age or even the purpose of the savings.
Fenouille: I read somewhere a suggestion that parents should think about starting a pension for their children. Is this a good idea? How would I go about setting one up if it is?
Andy: It is possible to start a pension for children and this has numerous benefits. Firstly, contributions will benefit from basic-rate tax relief at a rate of 20%. There is, however, a limit set by HMRC of £3,600 of contributions in the tax year 2011/12 which can be paid into a pension for a child. This means the government will top up the fund with an extra £720 if the maximum contribution is made, helping to boost the pot size.
Money paid in is likely to grow considerably for two reasons. Firstly, contributions benefit from the same tax relief that basic-rate taxpayers get.
The second major factor is the length of time the money will be invested. With the investment horizon of a child's pension fund extending over 50 years, this effect can be considerable. It is also worth remembering that the earliest access to the money under current rules is 55. Of course, this could change in the future.
There are a number of providers of personal pensions for children and a quick search on the internet should provide you with some options.
SkivingAgain: We have been saving for my son, who is nearly 16, since he was a baby and the account will have £7k in it when he turns 16. I think this is too much for him to be responsible for, so how can we make sure that he can't access it until he starts college, or needs it for a deposit, etc?
Andy: The only way to make sure is to check the small print of the account the money is saved in. Find out from there if he can access the savings when he turns 16. Look specifically at who has the responsibility for the account, and who can withdraw money from the account; is it just you or can both you and your son access the savings? Also, take a look for any conditions on the account that means it automatically transfers into your son's name when he turns 16 or 18? If you can't find the information in your account details, speak to your account provider.
If you're still saving, and want to have joint responsibility when he turns 16, make sure the account you have allows you to have joint or full access.
While you may feel £7k is too much money for your son to have responsibility for, you may want to encourage him to open a savings account in his name, in order to help him develop a good savings habit. When he turns 16 he will be eligible for a cash ISA which can be opened with as little as £1, funded at any time (up to a maximum of £5,640 per tax year), and are usually instant access.
aubergine70: My parents have put away quite a lot of money for my daughter in her name. I've divorced her father and rewritten my will but can a nine-year-old write a will too just in case?
Andy: To have a valid will, you would usually be aged 18 years or above and of "sound mind". However, if you speak with your solicitor for advice, you can find out the options available to you and ensure your will is set up correctly.
proudmum74: We're trying to set up some sort of fund to support my disabled baby daughter when she is older, should she be unable to work. What is the most effective way of doing this? Our local Barclays talked to us about normal saving accounts, but these don't allow us to save enough in them, or offer enough interest, to provide a realistic level of support. What would you suggest?
Andy: As everyone's circumstances are different, particularly with something as individual as the needs of your child, it is difficult to recommend one saving option.
When you are looking at long-term savings, which it sounds like you are in this case, you could think about investing some of the money, as typically the longer you are able to lock money away in investments, the greater potential for higher returns.
However, as with all investments, there are no guarantees, and you may not get out all the money you have put in. Take a look at the Investments pages on Barclays.co.uk or talk to an independent financial advisor about investment options, and that way you can decide if this option is suitable for your needs and the level of risk you are comfortable taking.
There are other ways that you can save over the long-term, such as bonds, which tie up your money for the future. Equally, you could look into Trust Fund options that might suit your family's needs. If you talk to a solicitor, they should be able to explain the options available.
If you are locking up money with the hope of greater returns in the future, it is always worth keeping some money aside in a savings account that has easier access to your money. You could think about storing some money in a long-term account, like the ones mentioned, but also open an account like a cash ISA, which gives you the option to top it up regularly, to a tax-free limit of £5,640. If you choose this option, check that the account you choose has instant-access, as not all of them do.
Although you mention that the Savings accounts you have been shown are not suitable, there may be some benefit to setting one up that you can top up, if you have relatives who would like to contribute to your child's future.
LaWeasel: I really like our first child's stakeholder Child Trust Fund. Are these type of accounts still available privately now the government has stopped doing vouchers? Who would you recommend?
Also, our second child is due soon and while we are not in a position to make regular payments, we'd like to start with a small lump sum and then make additional payments.
Andy: The stakeholder Child Trust Fund was a government initiative, which ceased to exist for children born on or after 3 January 2011. Children who already have a Child Trust Fund can continue with the account, but are not eligible to also have a Junior ISA.
However, your second child will be eligible for the new Junior ISA. As from 1 November 2011, parents of children under the age of 18 who missed out on the Child Trust Fund will be able to apply for a Junior Individual Savings Account (Junior ISA), which offers parents a new, tax-free way to save for their child's future.
While there will be no government contributions, friends and family will be able to put money into either a cash Junior ISA or 'stocks and shares' Junior ISA at any time. So if you can't make regular payments yourselves, you could boost the savings by asking for friends and family for donations instead of Christmas or birthday presents.
Other features include:
- Each child will be able to have one cash and one 'stocks and shares' Junior ISA at any one time
- The total yearly limit is £3,600 for all payments into these accounts
- The parent manages the account on the behalf of a child (at age 16 the child can manage the account him or herself)
- No withdrawals are allowed from a Junior ISA until the child's 18th birthday
- Accounts will become ISAs when the child turns 18
For more information on Junior ISAs, check out direct.gov.uk.
RueDeWakening: What shares-based account would you recommend for my 17-month-old? I'm happy for it to be high-ish risk for the moment as I want to keep it invested until he's 18 years old, with the money moving into progressively safer investments as he gets older.
raspberryhead: I'm interested to learn more about the government's child ISA scheme. Do you think it's any good?
Andy: In answer to you both, here are several options with varying levels of risk available. Which account is right for you depends on the level you're comfortable with.
Starting with low risk, there are children's savings accounts which provide some security and an element of interest, which will be tax-free provided an R85 form is completed.
Taking more risk, there are investments that can be held in your name, so you have control of them. You could choose an investment ISA, which offers you a tax-efficient way to save, up to a limit of £11,280 for the tax year - if you haven't used any of your tax allowance topping up a cash ISA.
Investment ISAs are generally thought of as medium-term to long-term investments, at least five to ten years, so these might be right for you if you're looking to set money aside for your baby's university fees, gap year or a deposit on a property - anything that's still a long way away.
If you're keen for the savings to be in your child's name, then you could open a Junior ISA. The details of this new type of account (to be launched by the government in November) are outlined above in answer to LaWeasel's question. If you choose a stocks and shares Junior ISA, it is likely that this will offer you the choice of high, medium and low risk investment options, depending on your attitude to risk.
As with all investments though, there are different levels of risk, and you may not get out the money that you put in.
missorinoco: Would you recommend the replacement to the Child Trust Fund (CTF)? And would you suggest switching from the CTF for my children who already have one?
Andy: Take a look at the details of the Junior ISAs laid out in answer to LaWeasel's question. At the moment, you are not able to switch from a Child Trust Fund to a Junior ISA, so you may want to keep topping up the Child Trust Funds you already have open.
If you haven't opened a Child Trust Fund for your baby, then a Junior ISA might be a good option for you, as it will offer tax-efficient savings (with an annual allowance of £3,600).
Alternatively, if you want to save regularly, take a look at Children's Savings Accounts, as some accounts offer better rates for those who are able to save regularly.
nilequeen: I want to save £100 per month for my daughter who was born a few months ago, but I don't want the money to be available until she's 18 - which account do you recommend?
Andy: The new Junior ISA (available in November 2011) is an option, as the Junior ISA must be held in your daughter's name but withdrawals from the account are not allowed until she turns 18. Anyone can fund your daughter's Junior ISA - at any time - up to a maximum of £3,600 per tax year, but be aware that once you've put the savings in, you can't make any withdrawals, so you won't be able to access the money.
Another option if you wanted to access your savings and benefit your household now, would be to look at an offset mortgage which allows you to save in individually named saving pots, and helps offset your mortgage payments. You can also access your money. However, any savings you are using to offset your mortgage won't be earning you any interest.
BartletForAmerica: Do you think there will be an option to change our son's Child Trust Fund (CTF) into a Junior ISA in the future? We are concerned that banks and building societies have no incentive to attract new business to their CTFs and that they'll now not be competitive.
Andy: At the moment, you are unable to switch from a Child Trust Fund to a Junior ISA, but the rules may change in the future, so do keep an eye on the regulations.
Child Trust Funds accounts already in existence will continue to operate as currently, so they will continue to benefit from tax-free investment growth. You can continue to contribute to them each year, up to the maximum amount set by the government, This is currently £1,200 but due to be increased to £3,600 in November 2011 which is the same limit as the new Junior ISA.
wahwahwah: We have a Child Trust Fund set up and pay £100 a month, but as Child Trust Funds are ending soon, is it best to go into the new ISAs, or set up a pension, or both? When will we know about the ISAs? And can we keep the Child Trust Fund or will the money be moved to another wrapper?
Andy: Child Trust Funds and Junior ISAs will remain separate types of accounts and at the moment, it's not possible to transfer Child Trust Funds into Junior ISAs or vice versa. As you have existing Child Trust Funds, they will remain the same and continue as normal. This means that they will continue to benefit from tax efficiency, with an investment limit of up to £1,200 a year overall (to which family and friends can still contribute).
From 1 November 2011, Child Trust Funds and Junior ISAs will have the same contribution limit of £3,600 (a £2,400 increase on the current CTF limit).
From April 2013, this amount will be updated each year in line with the Consumer Prices Index (CPI) and will continue to be aligned with the Junior ISA limit. The CTF will continue to run until your child's 18th birthday.
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