So how do you prioritise? Here are my four short rules of saving for children:
1) Fully fund your own individual savings account (Isa) and pension first. There is no point having a separate savings pot for children if you haven't got your own long-term investments under control. Even if you have, you can designate your own annual Isa allowance of £11,280 for a child, while making sure that it is fully under control and they don't automatically get the money at age 18.
2) Make sure you have a 'saving for children' conversation with all family members. Can grandparents contribute? Many want to but don't want to broach the subject and are waiting for you to bring it up first. Grandparents themselves could start the conversation with a simple: "I was thinking of putting something aside for Olivia and Jack's education." Overall, 13 per cent of parents surveyed for the Association of Investment Companies think their child's grandparents are planning to contribute or are contributing financially to students' university education (up from 11 per cent last year).
3) If parents and grandparents have spare income or capital they can consider a number of investment plans available to help save for children. These include the Junior Isa, which was launched on 1 November 2011; Child Trust Funds (CTFs), which are only open to children born between 1 September 2002 and 2 January 2011; and other children's savings plans which typically hold investments on behalf of children through a 'bare trust'. Many investment trusts cater for children's savings, being available from as little as £50 a month, or lump sums of over £250.
Both Junior Isas and CTFs have an annual savings limit of £3,600 a year. Thesis Asset Management estimates that if parents invested £3,600 each year from the child's birth for 18 years then a total investment of £64,800 in a Junior Isa could be worth over £106,000 based on 5 per cent growth and/or accumulated income.
4) Grandparents may wish to consider a pension for their grandchild(ren) as this is the most tax-efficient vehicle and leaves the longest legacy. According to data produced by Skandia, if grandparents put just £240 a month (which equates to £300 a month gross contribution) into a pension for a grandchild, each year for 18 years, when the grandchild reaches age 60 they could be a millionaire. This is based on 6.5 per cent investment growth a year and no further contributions being made by the child. The child can of course make further contributions when they start work to create an even bigger pension fund.
From the moment a child is born, they are eligible to receive contributions of up to £3,600 into a pension each year. Anyone is able to make the contribution on behalf of the child. Unlike other investment options, such as a junior Isa, a pension can provide basic level tax relief, even for a child who is not working, making it an extremely attractive long-term savings option. On an annual contribution of £3,600, £2,880 is paid by the grandparent and £720 is paid by the government into the pension in the form of tax relief.
