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60-Second Guide To Investing For Children

By Jane Mack (TMFJane)
December 6, 2002

Sometimes it pays to be a kid. You don't have to pay for the roof over your head, put the food on the table or buy boring things like houses. In fact, if you get any money you usually don't even have to pay tax on it. So, instead of grumbling about school again, tell your mum and dad about the following instead:

0:57: National Savings

Your parents, grandparents or anyone else for that matter, can buy you a special Children's Bond. They last for five years and can be bought in units of 25 up to a maximum of 1,000. At the moment they're paying an interest rate of 4.65% which is made up of 3% each year for the five years with a bonus at the end of 9.6%. The good thing about them is that they're tax-free for both you and your parents. Pretty good, eh?

Well, sort of. It's true that they're a pretty safe bet but as your parents can only save 1,000 for you, you might want to point them towards something else instead or as well. Note that you personally can't get your hands on the money until you're at least 16 which is a bit annoying but, if your parents are interested, they're quite easy to buy. Just tell them to go to the Post Office.

0:40: Friendly Societies

If your parents even mention these words then say 'Aaaargh!' in a very loud voice and steer them in a different direction. The money is usually invested in a 'with profits' endowment policy and these usually don't generate much in the way of returns not least because the charges are rather high. The only advantage is that they're tax-free but don't be tempted by that. They're usually a poor investment. Your parents can only invest 25 a month anyway on your behalf and you want to encourage them to invest more than that for you, don't you?

0.30: Savings Accounts

Your parents can open a bank or building society account and save money in it for you. The interest rates aren't usually very high but you won't have to pay tax on it as long as your parents fill in a form called an R85. However, if money is saved for you by a parent and it generates more than 100 of income then they will have to pay tax on it. If both parents save for you then the money can generate 200 of income before they have to pay tax.

If anyone else saves the money for you, such as a grandparent, then the 100 allowance doesn't apply and you can earn up to 4,615 each year before you have to pay any tax. Fpr more on savings accounts see our Savings Centre.

0:25: Unit Trusts

Now we're talking! Anyone can invest money for you in the stock market and the best way to do that is via an index-tracking unit trust. This is usually registered in the name of the parent or relative but with your initials after their name. This lets the taxman know that the unit trust belongs to you so that any profits you make can be offset against your own annual Capital Gains Tax allowance. At the moment this is worth 7,700 a year so you can make quite a lot of profit before you have to worry about paying CGT. You won't be able to take control of the money until you are 18 though as children can't buy or sell shares until then. If your parents take this route then make sure the money is invested for as long as possible at least five years and preferably ten or more.

0:17: ISAs

If your parents aren't using their ISA allowance for themselves, you can tell them they're being silly and then ask them if they can use it for you. Any money paid into it won't actually be yours as you're not allowed to have an ISA, but it does mean that any money generated in it is completely free of tax. They can save cash for you inside an ISA and can also invest in shares for you, for example, an index-tracking unit trust as mentioned above. They can only save and invest a maximum of 7,000 a year for you but, hey, it's a start! See our ISA Centre for more details.

0:09: Stakeholder Pensions

This is quite a good way of getting your parents to save for you as they'll like the fact that you'll get free money from the taxman. Your parents can pay up to 2,808 each year into a stakeholder pension for you and the taxman will top it up to 3,600. You won't be able to get your hands on any of the money until you're at least 50 years old though. I know, I know - that probably sounds like a really long time to wait but, trust us, it'll come soon enough! Check out our Pension Centre for information of all types of pensions.

So, there you go. A quick guide for you to give to your parents. They'll be thrilled to read it!

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