Children have tax allowances
If your long term financial plans are designed to provide for your children, it can make sense to start the savings process on their behalf rather than pass it on by way of inheritance.

There are a number of specific products aimed at children and the tax regime means there are benefits in exploring more 'adult' savings routes in their name.

Children's bonus bonds
One of the safest ways to put aside money for a child is through National Savings Children's Bonus Bonds. These are available as separate issues with separate investment limits, currently a maximum of £1,000.

The bonds earn a fixed rate of interest for five years, tax-free to both parents and children. At the end of that period a bonus is added and the bond can be re-invested in the next issue for a further five years or until the child reaches the age of 21.

More risky, because of their exposure to stock markets, are children's bonds available from Friendly Societies. A maximum of £25 a month or £270 a year can be invested in the bond, normally for a 10-year period.

These bonds offer the potential for tax-free growth, can offer some life cover for the child but are undermined by the high charges and inflexibility which often accompanies endowment-style policies.

Savings accounts
An alternative would be to open a conventional children's building society account. If you use a simple trust you can retain control of the money invested but the child remains the ultimate beneficiary. By filling in the Inland Revenue's R85 form, interest rates are paid gross.

The interest is tax free up to the annual personal allowance of £4,615. But if you, as a parent, make deposits for the child which earn interest of more than £100 (£200 for two parents) then the whole amount would count as your own income for tax purposes.



Trusts
A simple trust can also be used to buy shares for children giving you control and them the benefit. This is a longer term savings approach and would allow you to utilise their capital gains tax exemption, currently £7,700.

Stakeholder pensions
Longer term still is the notion that you might want to start a stakeholder pension for a child. Unlike Individual Savings Accounts there is no lower age limit. But the pension would only become available to a child at the age of 50 and who knows what will happens to the pensions industry or financial markets over that time. However, on the grounds that you cannot start saving for your pension earlier enough it is not beyond the realms of possibility.


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