MONEY COMMENT
A Great Man's Advice On Saving

By Cliff D'Arcy
August 21, 2003

Did you vote in last year's Great Britons poll? I voted for the eventual winner, Winston Churchill, both for his leadership skills in wartime and peacetime, and for his brilliant wit. Here's one of his great quotes: "Saving is a fine thing. Especially when your parents have done it for you."

Of course, being born in Blenheim Palace as a descendant of John Churchill, first Duke of Marlborough, Churchill didn't have to do much in order to be wealthy! Sadly, the vast majority of us are destined to do our own saving, either for ourselves or our offspring. Here are some simple ways to save for a rainy day and for the long term.

Short-term saving for adults

It's always a good idea to save for a rainy day – we recommend putting no more than six months' salary aside to dip into in emergencies (such as major repairs, long-term illness or being out of work). One option is to save in an instant-access account with a high rate of interest, such as those in our Savings Centre. Alternatively, you can earn high rates of interest tax-free in a cash mini-ISA. Learn more about these marvellous savings accounts here.

Short-term saving for children

Children are often given cash gifts by relatives and friends; it's a good idea to keep this money separate from money from parents. That's because children can only earn up to £100 without paying tax on interest on capital given to them by a parent (so that's £200 for Mum and Dad combined). For example, a couple could give their child £5,000, which would earn the maximum £200 a year tax-free interest at an interest rate of 4%. One penny over £200 and the whole lot is taxed, so beware!

As for money from everyone else, this is not taxed until your child's total income (including the £200 above) exceeds its personal allowance, which is £4,615 for this tax year. To earn more than this, you'd need to have over £115,000 on deposit earning 4% a year, which won't be a worry for most of us. (In any event, you'd have to be both filthy rich and completely mad to give your kids this much cash, if only because it's a poor long-term investment!)

As for choosing an account, I use the Smart 2 Save account from Nationwide BS, which pays 4% a year. You can find a list of other Best Buys at Moneyfacts (go for high rates, not freebies and gimmicks). Don't forget to fill in Inland Revenue Form R85 if you don't want tax to be deducted from the interest your child earns.

Long-term investing for adults and children

If you're saving for something that's ten or more years away, your best bet is to invest, which means using the stock market. If you have, say, £25 a month to spare, you can invest in a low-cost, flexible and cheap index tracker, which will beat eight out of ten fund managers over the long term.

Alternatively, a low-charging investment trust will do much the same job, but beware of 'child branded' products that have under-performed (get brochures for five different plans here). Incidentally, never buy 'children's bond'-styled products, as these are usually branded endowment policies, which are utterly dire.

You can invest in your child's name, which means that they could end up paying tax if you're hugely generous. Then again, if you decide to invest in your own name, you can put away up to £7,000 a year in a shares maxi-ISA (a tax-free wrapper that keeps the taxman away), which will boost your returns.

Finally, Child Benefit is ideal for investing for children: you get £16.05 weekly for your first child and £10.75 for each other child, which is £835 and £559 a year respectively. Invest, say, £50 a month for your child over eighteen years, with annual growth of 9%, and you'll finish up with a tidy £25,973 to help your child's transition into adult life. Just make sure they're grateful when you help them out!

More: Visit our Savings and ISA centres | Making Your Kids Pay Their Way | Make Your Child A Millionaire.