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Individual Savings Accounts |
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Some of them may look cute but they are all horribly expensive. Madeline Thomas, a former Reuters money reporter and leading UK personal finance journalist, on five of the very best savings schemes for kids. Click to view Top 5 Kids Savings Schemes.
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Best for Saving (Individual Savings Accounts) |
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 Individual Savings Accounts are ideal for building up a substantial nest egg for a child. They are tax free, cheap and flexible. If you have already used up your annual allowance or are short of cash, perhaps grandpa could be persuaded to help? Start now and it could pay their university fees or the deposit on their first home. |
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| For children too old to qualify for a Child Trust Fund or for parents and grandparents who want to put aside more for their offspring, an Individual Savings Account is – without doubt – the best way to go. They are free of tax and can be invested in a wide range of different financial instruments. The investor retains control of the money – which can be withdrawn at any time – and up to £7,000 can be invested each year, either through regular monthly payments or a lump sum. |
Tax Free |
 Most investment companies, banks and building societies offer Individual Savings Accounts. Most offer the option putting the money in an ordinary interest bearing account or placing it in a fund that is linked to the stock market. The interest only option offers total security but less potential for growth. Stock market linked funds, in contrast, offer a greater potential for growth but can go fall in value as well as go up.
Most financial experts agree that the stock market is likely to be the better bet for long term investments. This is because even if the market falls in the early years, there will still remain plenty of time to make-up those losses and more. Also, when a child nears 18 – and may require the money to pay their university fees, say – the balance can be moved out of the stock market and into a more secure interest bearing account. |
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So which Individual Savings Account should you go for?
The current market leader among those offering a simple and secure interest bearing option is National Savings & Investment’s no-notice Direct ISA that pays 5.80% provided you put at least £1,000 in.
Those wanting to start with a smaller pot or wanting to transfer money in from an existing ISA should consider the Yorkshire building society's e-ISA, paying 5.65% with a minimum balance of £10.
“It allows transfers in and out for no fee,” said Money Saving Expert Martin Lewis. Aside from NS&I’s top-notch 5.80% , “it is the next best paying cash ISA.”
You can currently invest up to £3,000 each tax year in a cash ISA. To make use of the full £7,000 allowance, at least £4,000 must be invested in a stock market linked plan. |
Cheap Tracker |
Those looking for a stock market linked Individual Savings Account should consider Legal and General’s UK Index Trust. It is a low cost “tracker” fund, which mirrors the performance of the UK stock market. With an annual charge of just 0.5% it is one of the cheapest stock market linked ISA on the market.
Alternatively you could go for an “actively managed” stock market fund. These funds do not simply mirror the stock market index but employ a manager to pick what they hope will be the best performing shares. The charges are higher on these funds – typically 1.5% a year – but if you get a good manager the returns may make up for this.
To find a good actively managed fund you should go to an independent financial adviser. |
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Pros
- Tax free
- Flexible investment options
- High £7,000 annual investment limit
- Regular monthly savings or lump sum
- Instant withdrawals
- Perfect for parents and grandparents
Cons
- Money is held in the investors' name, not the childs'
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