WITH the school holidays in their infancy, the cost of bringing up kids is a hot topic for parents across Scotland. School trips are off the agenda, but the costs of keeping the kids entertained over the summer – let alone the extra costs of clothing and feeding them – are already mounting.
It doesn't get any easier when they get older and young adults are increasingly turning to their parents for financial support.
According to insurer LV>, the average cost of raising a child to the age of 21 is £18,032, although it predicts that f
igure will rise by up to 42 per cent by 2012.
The main focus of saving for kids in recent years has been child trust funds (CTFs). Under CTFs, introduced by the government in 2005, all children born on or after 1 September, 2002, are eligible for vouchers of £250 from the government, with a further £250 at the age of seven. Families with a combined income lower than the child tax credit threshold qualify for an additional £250 at both stages.
The money can be invested either in a government stakeholder account, a deposit account or stockmarket-based investments, but vouchers not used in the first year are instead allocated by the government to one of a range of selected funds.
Relatives and friends can top up the CTF by a maximum of £1,200 a year – tax-free – but the money can't be accessed until the child reaches 18.
Take-up of CTFs hasn't met expectations – three years after the scheme was launched, around a quarter of vouchers are still left to the government to invest. While apathy is part of the reason for this, the limitations of the CTF have been a deterrent for some.
A common objection is that, at maturity, the money generated by the CTF goes to the child. Many parents are uncomfortable with the prospect of their offspring being given control of a large sum of money at that age. Similarly, some are put off by the CTF annual investment limit of £1,200.
Instead, thousands of families have opted for non-CTF child savings vehicles. While many do use savings accounts, the long-term nature of the investment – assuming it is made early in a child's life it can be invested for up to 18 years – means stockmarket-based investments can be most effective in generating a decent fund to hand over.
While collective investments – particularly investment trusts – are more volatile than savings accounts or bonds, the peaks and troughs are smoothed out over the longer-term, creating more substantial returns.
The lengthy period of investment also means the cost of investing can add up significantly and eat into the eventual returns. In this regard, investment trusts lend themselves well to child savings.
"Investment trusts are entirely suitable for saving for children because they have fairly low costs, offer better returns than other collective investments and they get on with the job of investing rather than dedicating resources to marketing and promotion," said Francis Klonowski of IFA Klonowski & Co.
The average total expense ratio (TER) levied by investment trusts is 1.42 per cent, according to the Association of Investment Companies (AIC), compared with 1.62 per cent for unit trusts and 2.21 per cent for multi-manager funds.
While this may seem a minor difference, over 18 years additional annual costs create a performance drag that makes a difference to the returns that accumulate. Investment trust performance is also influenced by gearing, which provides the flexibility to borrow in order to take advantage of investment opportunities.
The average investment trust has grown 132 per cent over the past five years, according to the AIC, compared with 60.3 per cent for the average unit trust/open ended investment company.
A number of investment trusts run dedicated child savings plans, including Baillie Gifford, Witan, F&C, Glasgow Investment Managers, Scottish Investment Trust and Alliance Trust, with most allowing investments of as little as £25 or £30 a month.
"The beauty of investment trusts is that they are geared up to handle small regular savings, which is not always the case with unit trusts," said Charles Fotheringham, senior investment manager at Gillespie Macandrew.
Investing regularly also has the advantage of pound-cost averaging – by investing each month, you buy fewer shares when the price is high and more when the price is low, reducing the investment risk.
Most child savings trusts invest with a global mandate, giving investors exposure to international markets without needing to invest in specific regions.
"The most popular choice for investing for children tends to be the global growth trusts," according to Sherry-Ann Sweeting, marketing manager at the Scottish Investment Trust. "As well as providing a world-wide spread of investment risk and opportunity, global growth investment trusts tend to be amongst the most cost effective of collective vehicles, having very low management charges with TERs generally below 1 per cent."
Among the global trusts available as investing for children plans are the multi-manager Witan Jump plan, the Scottish Investment Trust – with the Stockplan: Flying Start – and Alliance Trust, which offers the First Steps account.
"There is an investment trust to meet every need, but the global ones tend to be popular as it can be hard to get global exposure," commented Fotheringham.
"Over 15 to 20 years, people are less likely to invest in very specific themes, such as Japan for example, so a generalist approach makes more sense."
However, he added that the global exposure offered by the big investment trusts is not always as diversified as it may seem. "Global markets tend to run in tandem so we prefer to have some themes rather than being too generalist."
Most investment trust child savings schemes offer the choice of investing through a bare trust or a designated account. Bare trusts are especially tax-efficient. Because the plan is held by trustees on behalf of the child, it remains outside a parent's estate for inheritance tax purposes, while the proceeds are treated as the child's so do not eat into capital gains tax allowances.
However, the money is transferred to the child at maturity, meaning parents lose control over it. In designated accounts, the parent controls the investment, which is treated as part of their estate for the purposes of IHT, but they can access it before the child turns 18. But income from the trust is tax-free if it's below £100 a year and falls within the child's personal tax allowance. If the person investing in the trust on behalf of a child is not a parent, but a relative or friend, then any tax due is treated as part of the child's tax allowance.
The full article contains 1134 words and appears in The Scotsman newspaper.
