09 Nov 2010 | Ian Bruce

Cutbacks, child benefit and investing for children 

If you are a higher-rate tax payer with young children then you could be forgiven for thinking that the Coalition government was not being very child friendly after recent announcements. First the Child Trust Fund was scrapped then, in a more controversial move, it was announced that Child Benefit payments would stop to higher-rate tax payers in 2013. To cap it all there are plans to let universities raise the level of fees charged to students.

We’ve already written about the demise of the CTF and our belief that there are better ways to invest over the long-term for a child. With CTFs the sums contributed by the Government were never going to make a substantial difference and the accounts would have always needed additional contributions to make them into worthwhile sums by the time the child could access the money at aged 18. In many instances these additional contributions were funded by Child Benefit payments.

The arguments for and against stopping Child Benefit payments for higher rate tax payers have been debated extensively in the press and, whatever your viewpoint, the loss of payments will be felt by many families. Take a typical family with two children and one higher-rate tax earner. The Child Benefit received by the family equates to £1,752 per year, and over 18 years, this equates to about £31,500 at current levels.  These sorts of sums could grow into substantial nest eggs which can then help pay some of the costs that children inevitably incur in the years ahead.

When the cutbacks take effect, parents may increasingly rely on the bank of Gran and Grandad to fund investments to their children’s plans. And, with Christmas looming, the message should be to invest in something with a bit more longevity rather than say the toys that are simply broken or forgotten about by the end of the Christmas holidays. Thousands of grandparents have already discovered the benefit of investing some of their own cash in investment trust savings schemes.  Many such schemes offer diversified investment together with little or no initial/annual charges and low total expense ratios (TER).  One such fund is Scottish Mortgage that has a TER of only 0.52% (as at March 2010). Many investment trust managers, including Baillie Gifford, also offer dedicated children’s products which allow investment from as little as £25 per month.*

So, as the Coalition government announces the biggest cutbacks to the British economy since World War II, then the message to people investing for their children should be ‘Keep Calm and Carry On’.

For more details of the Baillie Gifford Children’s Savings Plan click here.

You can let us know what you think of the plans to stop Child Benefit payment to higher-rate tax payers by leaving a comment below.

* Other charges include the dealing price spread, and stamp duty costs of 0.5% on purchases. The investment trusts also incur costs in managing and administering their portfolios (including dealing costs).

Please remember that, as with all stock market investments, the value of your investment can go down as well as up and you may not get back the amount originally invested. You also should note that tax rates and reliefs may change at any time and their value depends on your circumstances.

The views that are expressed in this BG Log should not be taken as fact and no reliance should be placed upon these when making investment decisions. They should not be considered as advice or a recommendation to buy, sell or hold a particular investment.

This BG Log contains information and opinion on investments that does not constitute independent investment research and is, therefore, not subject to the protections afforded to independent research.