This is a guest post by Lousie Tillotson. Louise is a first-time mum, who escapes the pressures of parenting by writing about personal finance for moneysupermarket.com and a number of other websites.
With the new coalition government scrapping all Child Trust Funds from 2011, many parents are left wondering what options are available to them if they still want to save for their child’s future. Babies born on or after January 1st 2011 will not be eligible to receive a CTF voucher, so it may be time to start looking at alternatives.
A CTF is a form of long-term savings account, which can only be withdrawn from by the child on or after their 18th birthday. Currently, no other savings account has this feature, but there are plenty of shorter term accounts to choose from which could, if chosen wisely, give you the same or better return on your money.
An ISA is perhaps the best option for long-term savings because, as with a CTF, you do not pay tax on the interest you earn. You can deposit a maximum of £5,100 into a cash ISA each financial year, and put the remaining £5,100 of your ISA allowance into a stocks and shares ISA. Alternatively, you can put the whole of your £10,200 allowance into a stocks and shares ISA each year. One thing to remember is that if you’ve already reached your annual limit and then withdraw money from an ISA, you can’t then ‘top it up’ again until the next financial year. An ISA gives you the best return if you can deposit as close to the maximum annual deposit allowance of £10,200 each tax year, so if you think you’ll fall short of this, or indeed go over it, then a regular savings account could be a better option.
There are several options here, too. Interest rates, investment terms and notice periods all differ between the type of account and even between providers, so you’ll probably want to compare a few different products. I’ve provided an overview of the most common products and how they compare to a CTF.
An easy access account is just what it says; it gives you easy, instant access to the money within it, without incurring withdrawal penalties such as loss of interest. Some accounts have withdrawal restrictions, such as only allowing you to withdraw at certain times of the year, or a certain number of times a year. Unlike the CTF, there is no deposit limit on most easy access accounts, so you can save as much as you like. These accounts typically carry the lowest payable interest rates, but they’re useful for ‘rainy day’ money.
If you want a more long-term savings option, a fixed rate bond might suit you better. These resemble the CTF in that the money is locked away for a period of time – which can be anything from 12 months to 5 years – and during that time interest is accrued at a fixed rate, regardless of the base rate set by the Bank of England. The downside to these accounts is that additional deposits aren’t always possible, so unless you can invest a large sum at the outset, your return may not be as high as you’d hope.
If you want to be able to make additional deposits, as you would with a CTF, and don’t want your money to be instantly accessible, you could try an account which requires you to give notice prior to withdrawals. Withdrawing without giving notice would mean a penalty loss of interest, so these accounts aren’t suitable if you think you’d need to withdraw emergency money.
Depending on the provider, the interest from all these accounts can usually be paid into a different account either monthly or annually. From a parenting point of view, this can come in useful as it could help to fund nappies, food and later, after-school activites and anything else your little one demands you pay for. When you first open the account, the interest payout probably won’t be all that large (unless you put in a large initial deposit), but as time goes on it should rise as the money in the account grows. And, of course, you can keep an eye out for new accounts on the market and transfer your savings if a new, better rate comes available.
I haven’t mentioned specific interest rates here as they can differ widely, even between accounts from the same provider. Generally speaking, the longer your money is ‘locked up’ for, the higher the interest rate, but this isn’t always the case. It’s best to carry out a comparison of the different accounts available before settling on one. But whichever account you choose, you’ll be secure in the knowledge that you’re setting a good financial example for your little one.