Investing for children

Investing some money – either as a one-off lump sum or on a regular basis – is an ideal way to give any child a head start in life. And, because of their low charges and long-term performance record, investment companies are a good way of investing on behalf of a child. It’s a particularly useful way for parents, grandparents or godparents to make a lasting gift – and one that the child will appreciate even more when he or she is old enough to know the importance of money.

A summary of some of considerations and features of investment for children are discussed below. We have produced a factsheet on investing for children which contains more details on how to invest on a child’s behalf and well as details on the tax implications and the government sponsored Child Trust Funds. See our factsheets for more information

Children under the age of 18 are not allowed to hold company shares in their own name. One way around this is for you to invest on their behalf. You can do this through any investment company saving and investment scheme and some management companies have plans specifically for children. You can choose to hold company shares either in your own name and “designate” on the application form that you are holding them on behalf of a child (by adding the child’s name or initials to the form) or, you can hold company shares in a “bare trust” for the benefit of the child.

Child Trust Fund (CTF)

The Government sponsored Child Trust Fund (CTF) started in April 2005. Each child born on or after 1st September 2002 was eligible for a voucher from the Government for at least £250 to start the account and children from low income families initially receive a voucher for £250 and then a further voucher for £250, receiving £500 in total. When the child is seven the Government will also make a further lump sum contribution and are currently consulting on additional lump sum contributions. Once money is placed into the CTF, it must remain there until the child is eighteen at which point the child is free to spend it as he/she wishes. Whoever receives child benefit payments on behalf of a child will be responsible for deciding where to invest the money until the child is sixteen. On reaching sixteen the child will be able to decide how the CTF is invested.

School or university expenses

Investing for school or university fees, where you are trying to achieve a certain level of return within a specified time frame is very different to investing without a specific need or goal. Knowing roughly how much money you will need, and by when, should help you choose what’s most appropriate for you.

Child’s Pension

Since 2001 it has been possible to start a pension for a child. In most cases, contributions of up to £3,600 gross, £2,808 net, can be made to a child’s pension each year. It is possible to pay in more than this but no further tax relief will be given on the contributions. Investment companies, given their low charges and long-term performance, are particularly suitable for this purpose.

What are the tax implications?

When setting up any investment scheme you need to take a close look at the tax situation, not only how it affects the child, but also how it affects you or any other donor. One of the most important questions to ask yourself is whether you will have to pay tax on the child’s investment income. This really depends on who is gifting the investment to the child and what their relationship is. If you decide to make a gift to a child you should be aware of the Inheritance Tax (IHT) implications.

Investment companies are a good way to save for children as they are an effective and cost-efficient investment vehicle which provides exposure to a diversified portfolio. The flexibility and accessibility of investment companies due to their low minimum investment levels and ability to spread risk makes them an ideal way to give any child a head start in life. Investors who are unsure whether this investment is suitable to them should obtain independent advice from their professional adviser.

We have produced a factsheet on investing for children which contains more details on how to invest on a child’s behalf and well as details on the tax implications and the government sponsored Child Trust Funds. See our factsheets for more information

Pension schemes