FOOL'S EYE VIEW
Giving Your Child A Financial Head Start

By Jane Mack (TMFJane)
August 13, 2002

An Australian friend of mine was a bit surprised to hear the other day that he and his wife will get a free £15.75 a week when their first baby is born towards the end of the year.

"What's the catch?" he said. "There isn't one," I said.

He's still a bit sceptical particularly when I said it was paid regardless of income and savings, but I guess when the money starts arriving in the family bank account on a regular basis, he'll have to concede that occasionally I'm right!

What's more to the point is what they'll do with that extra money. They weren't expecting it after all so they may as well pretend they're not getting it and salt it away for their child's future.

Currently, parents get £15.75 per week for the first child and £10.55 a week for subsequent children. These payments are made until the child is either 16 or, if he continues in full-time education, until he is 19.

Let's say you have one child. If you invest his Child Benefit, which comes to £68.25 per month, into an index tracker every month for 18 years then, assuming an average and realistic annual return of 6.4%, you will have a lump sum of £27,194 in today's money. Now, that should be more than enough to put your child through university when the time comes.

Obviously there are Capital Gains Tax implications here but, if you put the fund in the child's name then you can make use of his own annual CGT allowance and get around the problem by switching index trackers every now and then to realise the child's gains.

An alternative is to put the money into an index-tracking stakeholder pension for your child. Stakeholder pensions were originally set up to give those on little or no wage (women taking a break from work to have children, people on low pay or the unemployed) the chance to contribute to a pension and therefore take some of the pension burden off the Government.

What they hadn't bargained for was that a number of families with cash to spare realised that as anyone could have a stakeholder pension, regardless of age or earnings status, that meant that even babies could have one. And since they attract tax relief of 22%, it means the Government will add an extra 28 pence for every £1 put into the scheme. There's an annual limit to contributions of £2,808 a year but with the Government's contribution that takes it up to £3,600.

So, let's say our Australian friend and his wife put the Child Benefit into a stakeholder pension for their new baby. With the government top up, it would mean a total monthly contribution of around £87.50. By the time the child is 18, and assuming annual growth rates of 6.4%, they'd be looking at a lump sum of nearly £35,000.

At this point, they can stop contributing and just leave that lump sum to grow until the child reaches 50 at which point said child can think about retiring – and all because Mum and Dad sorted out a tidy little pension fund amounting to just over a quarter of million quid for him! And if he waits until he's 65 to retire, well, then, he's got a rather magnificent fund of nearly £650,000 to buy an annuity with. By that time, of course, Mum and Dad will be ready to move into a luxury old people's home in Barton-on-Sea and their child will be in a fine position to pay for it!

The good thing about stakeholder pensions is that you can stop and start contributions as you wish, so if you start a plan on behalf of a child and your financial circumstances change, you can stop without penalty. There is also the advantage for granny and grandpa, if they have some money to invest, of passing money that might otherwise be liable for Inheritance Tax to their grandchildren through a stakeholder.

The important thing to remember about investing for your children is that time is very much on their side. The sooner you start, the more they'll accumulate. And if you can afford to live without your Child Benefit, then investing it for your children is a way of putting it to good use.

> More on Pensions and Index Trackers