What is the cost of having children? Feeding and clothing them, holidays and presents – it all mounts up. Young adults put further pressure on the family's pocket with demands for cars, a place of their own or further education. Yet the help which previous generations might have received by way of grants for university education often no longer exists.
Herein lies the opportunity. Parents and grandparents usually understand they have no choice but to adopt a self -help strategy. Even the Government realises it has to do something to stimulate self -provision. This has received fairly widespread coverage in the media and has increased consumer interest in children's savings, according to organisations specialising in this area.
Some think-tanks are proposing to give children a start in life via entitlement to a cash sum as they reach young adulthood. Precise amounts vary, as do the underlying mechanisms, but one route is to give each newborn child £1,000 which, invested until an appropriate age, would provide a cash sum to fund tertiary education, for example.
The Government has another idea. A couple of weeks ago, the Department for Education and Employment announced the first round of the Children's Fund, which makes available £380m over three years to fund services to prevent children and their families suffering the consequences of poverty. Also planned is a £70m network of local funds.
So where will the IFA fit in? Recent history shows the popularity of equity-based wrapper products such as Peps and Isas has increased the overall popularity of equity investments. We would suggest this is equally likely with children's savings.
The foundation for any child's savings will always be their own bank or building society accounts. It makes them feel important and the interest offered to young savers is good. The top 50 children's accounts average 5.99 per cent and are not dependent on bonus payments, as are most adult accounts.
The thing to remember is that the amount of money in the account should be limited to short-term needs. Ideally, longer-term investment should be equity-based.
National Savings offers tax-efficient products suitable for a child's portfolio. The maximum investment for the children's bond is £1,000 and a bonus is paid on the fifth anniversary.
Children have exactly the same tax allowances as adults and most children will be entitled to receive income gross. If they have a building society account, a parent or guardian should complete Inland Revenue form R85 to ensure interest is paid without tax deductions until the April 5 following the child's 16th birthday.
If adults want to create a nest egg for their loved ones – and this usually involves grandparents – some degree of equity exposure would be wise. This is where the IFA adds the greatest benefit.
Equities should form the bulk of the child's portfolio for two very good reasons – greater growth and tax-free products. Children are rarely taxpayers, so it is unlikely they will need to use their capital gains tax allowances when investments are cashed.
There are thousands of equity-based products but not all are suitable for children. A good entry level for children into equity-backed investments is a children's bond from a friendly society. Unlike the plans offered to adults, the funding limits placed on children's plans rarely cause problems. It is a level of funding they can comprehend and is also comfortable for grandparents to afford.
The investment limits are £25 a month or £270 a year and the plan must be in force for 10 years to qualify for the tax-free status. These products also pay competitive commission for IFAs. For example, the Junior Bond from Family Assurance pays the equivalent of 120 per cent of Lautro rates, which means that savings of £25 a month into a 10-year bond would provide commission of over £110.
Once the 10th anniversary has been achieved, it is possible to arrange for the plan to continue for anything up to 25 years, with tax-free investment continuing up to maturity.
The tax-free growth potential offered by friendly societies can prove especially attractive when it is remembered that Isas are not available to those under age 18. The bonds can also be timed to mature on a special birthday or at a time when the funds are needed most, say, for university fees or the deposit on a first home.
Fund performance is also generally good. As a sector, friendly societies have consistently outperformed equivalent life funds.
While friendly societies provide a first base for a child's portfolio, they are by no means the only solution. If there is more money available for investment, there are many familiar products to select although there can be possible tax implications. Children cannot own Isas but they are able to own shares, unit trusts and investment trusts. However, gifting these products to children carries a tax burden.
Income earned by a child on gifts from its parents need special attention. If the income generated by the gifts made by one parent to one child exceeds £100 in any financial year, the parent is liable to tax on that income. An account that produces this income cannot be registered to pay interest gross even if the parents' gift comprises only part of the capital.
Most commonly, the investment will be made by an adult on the child's behalf via a designated account that allows the adult to trade, buy or sell, with ownership resting with the child for tax purposes. Most investment houses will be able to smooth the administrative path towards this sort of arrangement.
However, because gifts from anyone other than a parent are not subject to the £100 rule, any tax paid on income from these gifts because they are lumped in with the parents' contributions can be reclaimed on behalf of the child.
As for CGT, it is unlikely to be much of a problem since children can receive gifts from their parents without liability.
Trusts also have a place in planning for the passage of wealth from one generation to the next, especially if the grandparents are keen to endow their younger relatives. When preparing a legacy of this kind, care has to be taken and legal as well a financial advice should be provided.
Financial advice for children should follow the same guidelines as for adults if real capital appreciation is required. Risk can only be taken after a suitable amount of deposit-based funds are established. The creation of a portfolio built on solid foundations of low equity commitment, gaining in complexity as additional funds are committed, is more relevant than ever before. Children have a very good tax position, with specifically-designed products that generate excellent returns.
In many homes across the UK, there might soon be competition as to who reads Companies and Markets section in the FT.