Children's Finance
At a glance... Children's finance
Financial institutions like to ensnare new customers early, and have a number of attractive options for children
They're our future, children, or so the saying goes. And they're the future for the wide number of financial institutions who are keen to hook in young savers as early as possible in the hope that they'll become loyal and lucrative customers for decades to come.
But it's not just self-serving banks that are trying to encourage young people to use financial institutions as soon as possible. With the woeful state of financial education in this country, the state is keen to introduce children to personal finance early, in the hope that this exposure will help them become responsible, informed and careful adults.
And to encourage a culture of saving, the Child Trust find has been introduced to give everyone a start from birth.
Child Trust Fund
The Child Trust Fund (CTF) is a state initiative that aims to give young people a fund to access when they turn 18. When a child is born, a voucher for £250 is sent to the parents for them to invest in a recognised CTF scheme. Parents - and indeed anyone - can contribute to the fund, up to a maximum of £1,200 per year, and a further Government cheque will appear after the child reaches the age of seven.
If you don't move to invest the voucher, the state will do it on your child's behalf. And the money will go into a cash fund.
Any growth in the fund is tax free, like with an ISA. If, at the time the fund comes to an end, the beneficiary wishes to continue to invest, they can transfer the money tax-free into another investment vehicle.
None of the money placed in the fund can be withdrawn until the child's 18th birthday, at which point it becomes theirs. And they can do with the money whatever they wish - while parents may hope it funds university or sets them up in their first home, the child is absolutely entitled to spend it on getting their feet pierced, or whatever.
While there are any number of CTF providers, there are broadly only two types of fund - a cash CTF or an investment CTF.
Cash funds keep any money paid into the fund in cash at standard savings rates. This means your investment is absolutely safe; there's no possible way that less money will be paid out than was paid in. However, savings rates are generally not the best way of investing money in the long term. This is particularly true now when rates are absolutely pitiful.
Investing in a cash CTF may mean that although you won't lose any money, the amount you get back may end up being worth less than it was when you paid it in.
Investment CTFs work in a very similar way to a pension. Because the product has a fixed end date - the beneficiary reaching the age of 18, the pension owner reaching a planned retirement age - the fund managers can plan their investment.
So for the first years of the child's life, the fund will invest in the markets - the slightly more risky equities market. Because this is a long-term investment, the fund has the time to weather the peaks and troughs of the markets, and, hopefully, provide strong growth.
As the fund reaches maturity, the money will be transferred to less risky cash investments, which will provide small levels of growth while protecting the capital.
Generally speaking, the investment CTF is the best option. There is more risk attached to this type of fund, but because it is a long term strategy it should do better than a standard cash fund.
Children's accounts
It's possible to open an account for a child pretty much from birth, but most banks and building societies offer child accounts from the age at which they start school.
These accounts are normally very simple cash savings accounts, with low initial deposits - normally just a pound. Children receive statements showing how their money is growing, and normally they will have access to their money at any time.
Alongside these accounts are a range of incentives. These can range from toys or money boxes given as a gift when the account is opened, but they now usually include some form of financial education - for example tools to help them work out how much they can earn in interest.
As the child becomes older, more services become available. Youth current accounts can be opened once the child enters secondary school. Some of these offer internet banking, while others have Electron cards - debit and cash cards that can be used at most retailers. The difference between these and 'adult' cards is they prevent the account holders from getting into debt - banks are unable to reclaim any debts from juveniles.
RSS Feed