Parents and their children face a host of financial planning problems that did not exist a decade ago. It’s not just paying those soaring school and university fees. High Soaring house prices mean that children leaving home also need help with buying their first property, homes, and the collapsing pensions system means they have to start saving for retirement much earlier than previous generations.
Providing for all these needs can be a financial nightmare. But the first step is todecide identify clearly what it is you are trying to achieve. Is your priority simply to pay for a good school and and a stress-free university experience to give your offspring a good start in life? Or do you want to give your child a helping hand by contributing to longer-term savings in his or her name, perhaps in a way that will help to develop an understanding of personal finance? issues?
Many parents seem not to address this basic question: more than 70 per cent do nothing more ambitious than making deposits in bank and building society accounts, according to research by the Association of Investment Trust Companies. There is nothing inherently wrong with that. Deposit accounts have the advantage of liquidity and security, which may be important. But many also pay poor rates of interest. Some struggle even to match inflation. You can do better, but only by accepting some risk for investing in the markets. According to the Investment Management Association, £50 a month saved in the average fund over the 18 years to 2003 would have yielded a return of more than £22,000, compared with just under £14,000 in the average building society.
Parents whose main priority is to pay the bills for education and, perhaps, a house or car for their children, need first to decide how much they will need, and when. These sums can be a surprise to new parents. The National Union of Students puts the average cost of each year of undergraduate university study at £7,523 including tuition fees at a maximum of £1,125 for the academic year 2003/2004. Assuming inflation at 2.5 per cent, that adds up to a cash requirement of about £39,000more than £36,000 for a three-year course for a child born now.
House prices may not stay at the current high levels. But on these inflation assumptions, the same child(or his or her parents) would have to find more than £24,000 in 2022 for a deposit on an average house. According to The Children’s Mutual, the children’s savings specialist, paying for university, a house deposit and a wedding for a child born this week would cost £42,000 now, or £65,000 at 18. That requires monthly savings, starting immediately, of £200.
There are plenty of ways to do this. Many financial services companies run specialist savings plans for expenses connected with children, although investors should keep a careful eye on costs. Those who want to stay in cash could wrap all or part of their savings in a tax shelter wrapper such as a cash Individual Savings Account. Or they could invest in other tax sheltered products such as index linked or fixed interest savings certificates from National Savings & Investments. Friendly society bonds are also tax sheltered, but only £25 a month can be invested this way, and the money must be locked up for lengthy periods.
Those who are willing to consider equity investments could look at structured products such as guaranteed equity bonds, which combine capital guarantees with a share of any improvement in the markets. Unit trust “tracker funds”, which seek to replicate a stock market index, are a relatively low risk investment for long-term savers, as are investment trusts – quoted companies whose share prices reflect the performance of underlying assets. These trusts tend to have low costs, and some advisers say that, after a scandal-ridden period, it may be time to reconsider investing in zeros – a class of share in split capital investment trusts that has a fixed life and pays a pre-determined (but not guaranteed) return on a specific date.
Those who want to invest on behalf of their children also have a variety of options. Various deposit accounts can be opened, even for very young children and, from the age of 16, children can open mini cash Isas in their own names. The Child Trust Fund, being introduced from next April,next year, will gift a minimum of £250 to qualifying children, and friends and family can add a further £1,200 a year tax free. The money is locked up until the child is 18, when it becomes his or her property. Children under 18 are not allowed to hold shares in their own names, but parents can invest on their behalf – retaining legal ownership but relinquishing beneficial ownership to the children. A way to do this is through an investment trust savings scheme.
Finally, how about setting up a pension for your child. Contributions of up to £3,600 a year can be made to a stakeholder pension on the child’s behalf, and tax relief on the contributions brings the net cost down to about £2,800. The money is locked up until the child is 50, but he or she may be grateful if it forms the basis of an early retirement fund – even if you are not around to hear the good news.
