There is good news today for those looking for children’s savings options, following the recent scrapping of the Child Trust Fund scheme (CTF).

The Government has today announced it will launch the Junior ISA, a tax-free savings account for children, in Autumn 2011.

Here are the important points about the planned Junior ISAs:

-  Parents can open a Junior ISA for any child under 18

-  Savings by parents and friends into the children’s ISAs become the property of the child, and are locked in until the child turns 18

 -  Savings growth in the Junior ISA is tax-free but, unlike the CTF scheme, there will be no government contributions or automatic enrolment

-  Maximum savings limits for childrens ISAs have not been announced, but may mirror the old CTF allowance of £1,200 per year

 -  The Junior ISAs will come in 2 types, reflecting ‘adult’ ISAs: the cash ISA and the stocks and shares ISA

-  The 5m existing CTFs are not affected by the new ISAs for children, and will continue until the child turns 18

Currently, adults not using their own ISA allowance of £10,200 per year are, of course, free to save for their child using an ISA in their own name. The adult ISA allowances are £10,200 per year of which half (£5,100) can be in a cash ISA, and half in a stocks and shares ISA. Alternatively, all £10,200 can be placed in a stocks and shares ISA, but not the other way around – only £5,100 is possible in the cash ISA. These are annual allowances, however – each year your slate is wiped clean, and you start again, with a fresh ISA allowance.

Adult cash ISAs can be opened once a child turns 16, and stocks and shares ISAs are available to those aged 18.

Savers are increasingly in danger of losing money by failing to factor in tax and inflation, when comparing best bank savings accounts.

Savers who focus on bank current accounts are also failing to consider the longer-term tax-free savings options offered by stocks and shares ISA accounts.

Many savers on comparison websites, who look at the current listings of instant access current accounts, will see bank savings accounts from ING and Santander which describe ‘top interest rate’ accounts offering 2.75% gross per year.

In order to work out the real value of savings interest that will be paid in such accounts, it is first necessary to remember that the 2.75% figure is gross. In other words, any earnings are liable for income tax.

Income tax does not just apply to your salary, but to all forms of earnings classified by the Revenue as income, including interest on savings in traditional bank current accounts.

For a basic rate taxpayer, this means that 20% tax would be due on the 2.75% interest, so that the actual interest paid net by ING and Santander would be just 2.2%. A higher rate taxpayer would be worse off again, paying tax at 40%, so that he would receive only 1.65% of interest on his savings.

Then inflation must be considered, which currently stands at 3.1%. Every saver must keep the value of their money growing ahead of inflation, to preserve its ‘buying power’.

This means that a 20% taxpayer would need to achieve at least 3.9% in savings growth, before his money is really growing. The 40% taxpayer would need to achieve almost 6% in interest, to achieve the same.

Investment funds offer a golden opportunity to expose your money to the attractive growth rates that can be accessed in stocks and shares. Investment funds pool together the cash from many investors, and a professional fund manager then invests the cash in a range of stocks, shares, and other asset classes, thus cutting the cost of funds investment for each individual, while at the same time spreading investment risk over many companies and investment types.

Historically speaking, funds investments almost always outperform cash and bank account savings in the longer term. Investing in funds is, therefore, a great way to beat the bank! These days, investing in funds can be done through a stocks and shares Individual Savings Account (ISA), so that you gain a tax advantage on your returns as well.

When looking at funds investment, the first step is to be clear in your mind how much risk you want to take. Are you looking for solid funds with low risk and moderate growth, perhaps focussed on large UK and US companies, or are you a more agressive investor, prepared to take a higher risk for the prospect of a higher return, perhaps by investing in the more exotic ‘emerging markets’ of the Far East and China?

The best way of doing this is to talk to one of our expert funds advisers.  With just a few simple questions, we can establish where you come on the sliding scale from the very defensive to the very aggressive investor. Alternatively, you can check this yourself online, by answering the same questions using our simple Risk Profiler tool within the Principle First Investment Planner.

Investment funds – which fund should I choose?

There are various strategies for investment in funds. The first choice is whether to choose active or passive investment funds.

Passive investment funds are set up to follow or ‘track’ the index of their respective stock market. Tracker funds invest in various sectors and industries in proportion to the current structure of the index, so that their performance follows the performance of the index very closely. Tracker funds do not, therefore, incur large dealing charges by taking short-term positions (i.e. buying and selling assets often in an attempt to cash in on short surges in the performance of individual stocks).

Tracker funds tend to keep their investments steady in the longer term, prompting the motto for managers of passive investment funds: ‘Whatever you do, do nothing!’

Managing index tracker funds is, therefore, a relatively economical process, making them the least expensive way of accessing investment funds. Some trackers invest to fully reflect the proportions of the index, others pick one stock from each industrial sector represented in an index – a process known as ‘sampling’.

The limitation of tracker funds, of course, is that your funds investments reflect the index, but cannot outperform it for a higher return.

Active investment funds – aiming high

Actively managed investment funds aim to outperform their index with a much more dynamic investment strategy. The fund managers of actively managed funds investments buy and sell stocks regularly in the hope of benefiting from short-term growth in the performance of individual stocks.

This requires extensive research by a team of analysts, as well as much higher transaction costs, and actively managed investment funds charge premium rates, but offer the prospect of outperforming the index (and the index tracker funds described above). 

Generally speaking, around one-third of actively managed investment funds succeed in outperforming their index, in any given year.

Principle First Investment Funds Portfolios – taking the heat out of choosing funds

At Principle First we have a range of funds portfolios tailored to all risk profiles. These are groups of funds chosen by our in-house funds experts. They are re-evaluated on an ongoing basis to ensure they are the best performers in their sector, and that their risk level remains in line with the portfolio where we have placed them.

Find out more about investing in funds – make an investment enquiry or ring 0800 678 5929 now

The homebuilder Barratt Developments has launched the UK’s first corporate Individual Savings Account (ISA) as a savings incentive for staff. The ISA will offer an accessible and attractive alternative to other forms of saving, such as paying into a company pension scheme.

Barratt’s is working with Legal & General to offer its workers an ISA with access to 10 investment funds. The ISA functions as a normal stocks and shares ISA account, which means that savers can pay in up to £10,200 per year, and enjoy tax advantaged growth on their cash. Barratt employees can save lump sum contributions of at least £200, or have regular savings deducted from their salary and paid directly into the ISA.

The initiative will offer younger workers in particular an attractive opportunity to save, but without locking their money away. By using the ISA, savers have easy access to their cash, but can build up a substantial ’nest egg’ that could form the basis of pension saving, later on.

Recent studies have identified a reluctance among younger workers to save into pension schemes, because they do not wish for their money to be ‘locked away’ until they retire. Halifax published a report which showed that the average age for starting a pension was not until 32, indicating that workers in their 20s, who may be marrying or buying their first home, prefer to keep their cash within reach, and were relatively unlikely to set up a pension as yet.

The trend was confirmed by Scottish Widows in it’s Pensions Report June 2010, which looks at all aspects of pension savings behaviour. One conclusion of the report was that the groups which tend to save well into their personal pensions and company pension scheme were married people and those in their early 40s, and that ‘young people lag behind’ in the pensions saving league. The new Barratt ISA account is certain to offer a savings structure that will appeal to the younger employee, and Legal and General claims that ‘company ISAs are set to revolutionise participation in company saving schemes’.

The European Commission is to raise bank savings protection under the Financial Services Compensation Scheme (FSCS)  to €100,000.

For the sterling area this will be set, based on exchange rates at the end of 2010, at between £80,000 – £85,000, and is a substantial increase on the current bank savings protection guarantee of £50,000.

‘This means that each person with UK bank savings will now be guaranteed a return of at least that amount, in the event that a bank or building society were to collapse or fail. The increased level of cover applies to any bank based in the European Economic Area, and is part of a plan to harmonise bank savings protection throughout the EU.

The measures will take effect at the beginning of 2011, as part of a general strategy to reassure savers who were unsettled by the failure of the Icelandic banks in 2008. The proposals also stipulate that compensation of UK bank savings will be paid within seven days, whereas investors in the Icelandic banks had to wait for up to 8 weeks for their compensation, after the 2008 collapse.

Information from the Financial Services Compensation Scheme (FSCS) indicates that the new levels will cover 98% of those with UK bank savings, compared with 97% who had been covered by the lower £50,000 level.

The higher compensation levels will also be an added incentive to the 37% of UK households who now have savings ISAs and are using ISAs savings as a means of building up UK bank savings free of tax. Consumers in the UK are currently entitled to an Isas savings allowance of up to £10,200 per year, of which half can be in a cash Isa, and half in a stocks and shares Isa.

The proposals also indicate changes to the remit of the UK bank savings protection scheme. so that bank savings protection can be applied for through the FSCS in the event of the failure of a foreign bank. This will mean that UK savers will deal with an authority in the UK, rather than having to deal with a bank savings protection scheme in another EU country.

The new ISA sales figures, from the Investment Management Association, showed a major increase on the sales levels of ISA accounts in the previous May, which totalled £360m.

The government’s announcement in the June 2010 budget that ISA allowances will increase in line with inflation have boosted further the popularity of the ISA as a tax-free savings option. Any interest paid on ISA savings in a cash ISA is not taxed, making ISA accounts a more attractive option than bank savings accounts.

 The ISA option has already been taken up by 37% of households in the UK, according to Halifax.

Increased ISA savings limits

The annual allowable limits for tax-free savings in ISA accounts now stand at £10,200 in 2010/11.

ISAs come in two variations. ISAs provide tax-free growth on savings in an ISA cash account, or tax-advantaged growth in stocks and shares ISAs.

ISA savers can have both types of ISA accounts, investing up to half their total allowance, or £5,100, in a cash ISA, which combines the tax-free benefit with the safety and security of a bank or building society account.

ISA savers can also use their ISAs to invest in the stock market, by opening a stocks and shares ISA, where they can invest up to the remaining £5,100 of their ISA limit.

ISA savers who do not wish to have a cash ISA can place their full £10,200 ISA savings allowance in the stocks and shares ISA, although the reverse does not apply - the full £10,200 amount can not be placed in a cash ISA. The limit for ISA cash savings is capped at £5,100.

Of those shopping around for the best ISA deals this year,  81% will be opting for stocks and shares for their ISA savings, according to a recent survey by Barclays Stockbrokers. This is because interest paid the ISA cash accounts has been driven down by the currently low Bank of England interest rates, making ISA cash accounts less attractive then the stocks and shares ISA, in the current economic climate.

Government think tank the Centre for Policy Studies has published proposals for a radical rethink of pension savings and tax-incentivised saving in Individual Savings Accounts (ISAs).

The five-point plan contains the following key suggestions for simplifying current frameworks for pensions savings:

1. There should be an annual cap on all tax-incentivised savings of £45,000, including a cap of £35,000 for pension savings. Tax relief should be at the saver’s marginal (i.e. upper) tax rate, offering some 50% tax relief to those earning over £150,000.

2. Savers should be able to access at least some of their pensions savings before retirement. This could be made workable by bringing the pensions and ISAs areas closer together. For instance, pensions saving using ISAs could be encouraged by offering retrospective tax relief at retirement on ISAs savings by re-nominating them as pension savings. Also, existing savers should be allowed to take 25% of their pension savings before they retire.

3. Partners should be allowed to use each other’s pension pots for pensions saving while at the same time receiving tax relief, irrespective of their own earnings circumstances.

4. Unused pension savings could be bequeathed to other family members’ or third parties’ pension schemes, free of Inheritance Tax (IHT). This would encourage pension saving by allowing wealth to cascade down the generations, and strengthening the sense of personal ownership of pension savings.

5. Auto-enrolment under the government’s plans for pensions in the National Employment Savings Trust (NEST) scheme should be extended to include pensions saving in ISAs. This should appeal in particular to younger savers, who could feel that their longer-term or pension savings were working hard for them, without being ’locked away’.

“[The report] also describes steps towards sweeping away the two-track pension/ISA tax relief regime and replacing it with a single, unified tax framework, on that is easy to understand and attractive to long-term savers. Such a radical simplification is a prerequisite to encouraging more people to save more, and it would, for example, enable the industry to offer customers a simple savings continuum, perhaps under a ‘lifetime savings’ banner,” said the Centre for Policy Studies.

When helping you to plan funds or other investments, a good financial adviser will first go through the process of identifying your investment risk profile.

This will define the maximum risk level you would like to see reflected in the investments you will make.

This can be done in a face to face conversation, but also online using the Principle First Investment Risk Profiler Tool here on our website. By answering a short sequence of simple questions on your attitude to risk, the investment risk profiler will quickly inform you of your risk level, which in turn will enable your adviser to recommend investments in one of a range of funds, investment products, or in one of our ready-made Principle First Investment Portfolios.

The Investment Risk Profiler tool classifies investors in one of six risk profile categories.

Investors with a ’very defensive’ to ‘defensive’ risk profile feel comfortable with  only a very low level of risk in their investments. They want their money placed where it is safe and secure. They may be most comfortable with the traditional bank deposit account, cash Individual Savings Accounts (ISAs), or guaranteed investments that assure you there is zero risk to your capital, and that you will be repaid at least the sum invested.

Investors with a ‘cautious’ risk profile are not quite as averse to risk as the defensive investor, but would certainly not feel comfortable with investments that are subject to large fluctuations in the shorter term.

The investor with a ‘balanced’ risk profile may be prepared to accept a mix of low-risk and medium-risk investments. If you have a balanced risk profile you may opt for a stocks and shares investment through a stocks and shares ISA, to target a relatively good return in the longer term. The investor with a balanced risk profile is likely to agree, in consultation with his financial adviser, to accept that the value of his investments may fall as well as rise.

Investors with a risk profile ‘aggressive’ to ‘very aggressive’ view a higher risk level as a positive element in their strategy to achieve a potentially higher return. These are investors who will not be nervous to see fluctuations of 25% or more in their investments in any given year, and in fact may view a drop in stock values as an opportunity rather than a threat – an opportunity, that is, to snap up additional investments at a bargain price.

Are you curious to know your risk profile? Test your attitude to risk right now with our Investment Risk Profiler Tool, or call us to discuss further on freephone 0800 678 5929

The cost of raising a child is now £201,809, which equates to £800 a month, or £26 a day, the LV= survey reveals.

Childcare and education remain the largest single cost elements in the financial plan. At nearly £54,700, the cost of childcare now outstrips the cost of education, which comes in at almost £52,900.

Other major costs to be built into your financial planning include food costs (£17,490), clothing (£14,035), holidays (£13,207), and the cost of babysitting (£11,003). Hobbies and toys come in at £10,780.

To build a financial plan that will help spread the burden ahead, couples planning a family can benefit from personal financial advice, or online financial advice, from a qualified independent financial adviser.

Financial planning to finance third-level education for your child can be particularly effective, as the investments you make now have a considerable time to grow and mature.

Good financial planning advice may include considering the following savings and investment strategies.

Individual Savings Accounts (ISAs) are a great way of tax-free saving, either in a cash account (the cash ISA) or in the stock market (the stocks and shares ISA). While the stocks and shares ISA is the slightly more risky of the two, it is generally accepted that stock market investments have the potential for a substantially higher return than cash over a 15-20 year period. This makes them an ideal element in any financial plan to save for a child who may, for instance, wish to depart for third-level education at age 18.

Children’s Bonus Bonds are a 100% secure savings option for your child, as they are guaranteed by HM Treasury through NS&I. You can save from £25 to £3,000 in each ‘issue’ of the bond and returns are tax-free.

Another great financial planning strategy for a child is an offshore bond. Savings in the bond are tax-free while the funds are still held offshore. However, with good financial advice it is possible to write off the tax against your child’s tax-free allowance, which is the same as an adult’s at £6,475 per year.

Would you like further information on financial planning for your family? Make a financial advice enquiry online or call us on freephone 0800 678 5929 now

The Child Trust Fund scheme provided a £250 or £500 child trust fund voucher to every child born after September 2002, for investment only in a Child Trust Fund. It has now become the victim of government cuts and will be phased out completely by the end of the year.

The companies managing existing Child Trust Funds have pledged to continue to so do, but there is speculation that rates of interest in the accounts, and government’s gentle tax treatment of savings in the scheme, could be adversely affected once the CTF scheme is closed. Savers may, therefore, feel less confident about continuing to use the CTF for future contributions to their children’s savings.

 For them, and for future parents who will no longer receive the child trust fund voucher, there are a number of children’s savings alternatives, moving forward.

Children’s Savings – What are the options?

There are many providers offering savings accounts specially designed for childrens savings. Tax-free interest is available on children’s savings, but not automatically – parents must fill in an R85 form for each account.

You can set up an offshore bond for your child, which makes your children’s savings tax-free while the funds are still held offshore. They can be brought back ‘onshore’ once your child turns 18, at which point tax is payable on your children’s savings. However, if this is done over time, the tax can be written off against your child’s tax-free allowance, which is the same as an adult’s i.e. currently £6,475 per year.

ISAs can be opened for a child, once they turn 16, offering tax-free savings in the cash ISA, and tax-advantaged savings in the stocks and shares ISA.

Children’s Savings – Children’s Bonus Bonds

Children’s Bonus Bonds are a secure savings option guaranteed by NS&I, which is linked to HM Treasury. You can save from £25 to £3,000 in each bond ‘issue’ and returns are free of tax. The bonds can be held until your child turns 21, at which point they must be cashed in, as they are no longer deemed to be children’s savings. You can use these bonds for children’s savings for any child – not just your own!

Children’s Savings – Child Stakeholder Pension

Did you know that it is now possible to open a pension fund for a child? The pension fund operates according to the same rules as any adult fund, and cannot be accessed until your child retires – however, your gift to your child is the constant knowledge that your children’s savings may have grown very substantially over a long time invested in the stock market, and could provide them with a considerable cushion, at the end of their working life.

Would you like to learn more about children’s savings? Make a savings enquiry online now or ring freephone 0800 678 5929.