MONEY COMMENT
Dreadful Savings Products For Kids

By Cliff D'Arcy
January 20, 2004

If you're saving for an event that's a long way off, say, ten years or more, the stock market will usually outperform cash and bonds. If you're saving for a child's education, you could be looking at a horizon of up to eighteen years. Over this period, a stock-market investment will usually pay off handsomely.

(In case you haven't heard, the UK stock market had a pretty good year last year, following three years of losses. The benchmark FTSE All-Share Index rose by almost 21%, with dividends reinvested, and the blue-chip FTSE 100 index returned almost 18%.)

However, it's important not to be suckered into buying child-branded products, as many of these widely advertised savings plans carry hair-raising charges!

Take, for example, the Junior Bond from Family Assurance Friendly Society, which uses the late Roger Hargreaves' Mr Men characters in its advertising. This is a tax-free savings plan that allows you to save between £10 and £25 a month (or an annual payment of up to £270) for ten years or more. However, just because it's tax-free doesn't make it any good - its unspeakably high charges see to that!

Your premiums go into FAFS' Sovereign Fund, a balanced managed fund that spreads your money across a range of assets, including shares, bonds, property and cash. Here's what you might get back from investing £10 a month for ten years (£1,200 in total) in a Junior Bond with an investment return of:

5% = £1,250 (your profit is £50)
7% = £1,360 (profit: £160)
9% = £1,500 (profit: £300)

So, after saving £10 a month for ten years with growth of 5% a year, you'll have made a pathetic fifty quid! You'd have done better saving the same amount into a bad deposit account (paying annual interest of just over 0.8%) over ten years.

Here's how the same £10 a month for ten years would have grown in a plan with no charges:

5% = £1,550 (profit: £350)
7% = £1,720 (profit: £520)
9% = £1,911 (profit: £711)

So, you can see that a huge slice of your gains is swallowed up by the Junior Bond's charges. This is because it's an endowment - one of the Fool's most disliked products. Ask yourself: why on earth would you buy an inflexible, high-charging life assurance policy to save for a child? It doesn't make any sense at all.

I suggest you steer clear of children's savings plans with the following features:

• Mass-market advertising using cartoon characters or celebrities (because you end up paying the licensing costs or appearance fees). These include the Thomas the Tank Engine fund from embattled investment-trust manager Aberdeen Asset Management and the Rupert Bear fund from Invesco Perpetual.
• 'Free' gifts, cashback or charitable donations (it's your money they're spending).
• Balanced or stock-market funds (medium- to high-risk products) that compare themselves to building society accounts (low-risk products).

If you want to save for children without paying rip-off charges, read this article then visit our Savings and ISA centres. 

More on this subject: Avoid These Awful Investments | Making Your Kids Pay Their Way | Investing For Children.