MONEY COMMENT
How To Make £50,000 For Your Kids

By Cliff D'Arcy
February 2, 2004

As a financial writer and parent of two small children, I'm often asked about saving for children. In fact, I'm seriously impressed at just how many parents, grandparents and other relatives are thinking ahead and planning their family's future.

Perhaps it's because the recent Commons vote on university funding - and the government's target to have half of all school leavers go on to further education - has focused the nation's attention on this issue?

If you're going to give your children a helping hand in their early adult lives, you need to start early and save hard. However, saving in cash probably won't do the trick. That because cash is usually a poor investment over the long term - often barely keeping pace with inflation (rising prices).

For example, if you wanted to build up £50,000, you could do it by saving £160 a month for eighteen years in a savings account that pays 4% after tax. For example, you could use a cash mini-ISA in your own name, into which you can pay up to £3,000 a year. However, the annual contribution limit for cash mini-ISAs is being slashed to £1,000 from April 2006, which throws a spanner in the works!

Alternatively, you could open an account in your child's name and pump money into it (after completing a form R85 to ensure that the interest isn't taxed). However, a child is only allowed to earn £100 a year from income on gifts from a parent (£200 from Mum and Dad combined), so you'll have problems with the taxman if your child exceeds this limit.

Gifts from other relatives and friends don't fall into this particular tax trap, but can you find someone willing to give your child £1,920 a year for eighteen years?

My daughter isn't even four months old yet, but I've already started saving hard on her behalf. I've opened a Halifax Monthly Saver account in her name, which pays 4.8% a year if I make eleven monthly payments each year. I'm paying £100 a month into this account (plus lump sums when I can) - but only until she has, say, £2,000 stashed away.

As for saving over longer periods, I know that the stock market is the ideal place for patient investors. I also know that many so-called children's savings plans include amazingly high charges, which massacre investors' returns! That's why I'm going to use a cheap, simple, flexible index tracker to save for my daughter's future (using a trust, of course). Learn more about index trackers here.

Assuming that this index tracker produces 9% a year after charges, £100 a month - a total of £21,600 - will turn into £51,946 after eighteen years. With any luck, that should be enough to see Miss D'Arcy through university with something left over!

More: Index Trackers | Dreadful Savings Products For Kids | Avoid These Awful Baby Bonds.