How to save for your children's future

Parents know all too well how much a youngster can cost. Alongside the nappies, pocket money and school trips there are longer term costs like funding a university course, buying a first car or helping to pay for a wedding that can all seem quite intimidating.

These expenses can be more manageable with careful planning but with the new government announcing that Child Trust Funds are to be scrapped, many parents will be wondering how best to start saving for their children now.

One option is child savings accounts. Many banks and building societies offer savings accounts for children. The rate of interest can vary quite significantly, though some also offer special gifts.

A second is children's Bonus Bonds. These are offered by National Savings & Investments (NS&I), which means they are backed by the government.

They provide tax-free interest for children under 16 and there is an additional bonus if the money remains untouched for five years.

'Big win'

Another option is Premium Bonds. These are also provided by NS&I and are often bought for children.

They offer the potential of a big win as well as many smaller prizes, but they do not pay any interest. This means that you may not see any growth on your investment at all.

Individual Savings Accounts (Isas) are a flexible, tax-efficient way to save for your child's future.

Isas are not available for children, but you could use your own allowance to save for them and any income or capital gains you receive will be tax-free.

A child can open a cash Isa once they are aged 16 or a stocks and shares Isa once they are aged 18.

With an Isa, you have complete control over where the money is invested, so you have access to it at any time. You can invest up to £10,200 in a stocks and shares Isa this year or up to £5,100 in a cash Isa. The value of tax savings and eligibility to invest in an Isa will depend on individual circumstances.

Another option is Investment Funds (Unit trusts/OEICS). There are thousands of funds available providing access to a wide range of differing types of investment, such as stocks and shares and corporate bonds.

Children under 18 cannot apply themselves but parents, or grandparents, can set up the investment and designate it as being for the child on the application form.

And then there are pensions. Setting up pensions for your children may sound extreme, but it could be an excellent way to save for the long term.

With this option they will also receive tax relief, even though they probably do not pay income tax. This means that if you pay £240 a month into a Self Invested Personal Pension (SIPP), it will be made up to £300 with tax relief, assuming a basic rate of income tax of 20%. As with all pension products your child can not access your money until they are aged 55.

When contributing to a pension for your child, then you can only put in a maximum of £2,880 - which, with tax relief - takes the amount up to the annual limit of £3,600.

Burden

Whichever route you choose to take, there are four principles that you should follow in order to maximise your child's investment and lessen the financial burden of life's milestones.

Saving for a child's future is a major financial decision

The best time to start investing is now. Investing for children is all about the long term, so to give your investment as much time as possible to grow, you need to start investing as soon as possible.

Secondly, invest as much as you can afford. Many people find it hard to work out how much money they will need to save to help their children. This is why we believe the best strategy is to put aside as much as you can afford.

Thirdly, think about saving each month. Unless you have a large sum to invest, a good way to build up significant savings for your children over the years is to start a monthly savings plan.

This can help you maintain a long-term investment strategy and it is a useful way of being disciplined about saving for your children's future - you will soon start thinking of your regular payment as an essential part of your budget.

If you were to put £50 a month from birth into the average UK stock market fund, it could give your child a pot worth £23,937 (based on a hypothetical investment that grows 6% a year and has an annual management charge of 1.5%, bid to bid, with net income reinvested) at the age of 21.

Of course, past performance is not a guide to what might happen in the future and the value of investments can go down as well as up and you may get back less than you invested.

Lastly, keep an eye on tax and take care if you are a parent. There is no limit on how much you can give or invest for children and they are entitled to tax-free allowances in the same way as adults.

If their total taxable income is less than the tax-free allowance they are due, a form R85 can be completed so they receive their interest without tax taken off.

However, there are some special rules if a parent or step-parent has given savings to their child. For more information contact a financial adviser or visit the HM Revenue and Customs website.

The opinions expressed are those of the author and are not held by the BBC unless specifically stated. The material is for general information only and does not constitute investment, tax, legal or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Links to external sites are for information only and do not constitute endorsement. Always obtain independent, professional advice for your own particular situation.