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Feathering the nest

I have two young children and want to invest some money for them to help with university fees and a house deposit in the future. What are my options?

The starting point is to look at your own finances as, for many parents, the best move would be to make your own finances as efficient as possible and then gift money to their children when the time is right.

For example, if you have a credit card or store card with an interest rate of 15 per cent-plus, you would be better off paying this off at the expense of saving for your children. Even if your only debt is a mortgage, if you have an interest rate of, say, 5 per cent a year, paying that down is still giving you a risk-free “investment” return of 5 per cent a year after tax and charges.

If you are not maximising Isa allowances, it might just be easier (and cheaper in terms of investment charges) to invest a bit more into Isas in your own name in the knowledge that part of the Isa is destined for the children at some point in the future. Minor children cannot invest in Isas in their own names.

Another scenario could be where a child’s 18th or 21st birthday coincides with your planned retirement date. If you are a higher-rate taxpayer now and are likely to be a basic-rate taxpayer in retirement, it could make more sense to fund pensions and then use some of the tax-free cash at retirement to fund the gift to the children.

Remember that children have a yearly personal income tax allowance but if the income results from a gift made by their parents, the parents will be liable to income tax on it if it exceeds £100 per annum.

In terms of tax-free products, NS&I offer children bonus bonds, which are five-year fixed-rate bonds that can be taken out for children up to the age of 16. The current issue is returning 2.3 per cent per annum compound, tax-free. This is a pretty unexciting return and if your children are young, the timescale for your investment is long. Therefore, it would seem to make sense to take some investment risk to try to achieve a higher return.

The most obvious tax-advantaged schemes, if your children were born on or after September 1, 2002 are child trust funds. They will have had their £250 voucher so should already have a plan in force.

Money cannot be taken out of the CTF (until your child is 18) once it has been put in. From a taxation perspective, neither you nor your child will pay tax on income and gains in the account.

A maximum of £1,200 each year can be saved in the account by parents, family or friends. What it boils down to is how much you are prepared or able to invest, whether you want your child to have full access at, say, 18, and what sort of sum you would like to build up for them.

Not all parents would be comfortable giving their children unlimited access to a sum of £40,000-plus at age 18, but this could conceivably be the figure if you invested the full £100 per month into a CTF for 18 years with a decent annual growth rate.

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