Saving for children ideally means putting money away for ten, or even twenty, years. Over such a long period it is vitally important to go for a low-cost option, because performance can never be guaranteed whereas costs are inevitable and can eat deeply into the value of the assets over the years.
Unless you are a very active and well informed investor, it is also important to choose an investment vehicle that can be trusted to make its investors' long-term returns its absolutely top priority. Investment trusts are good candidates on both fronts, and there are a number of children's savings products designed to make it easy and relatively inexpensive to invest in them.
Trusts can be a cost-effective investment option
On the costs and charges front, investment trust are almost always a lot less expensive than their unitised equivalents. Annual costs can prove particularly onerous on a long term investment, and the oldest and largest investment trusts have some of the lowest in the investment industry. The total expense ratio of the Alliance and Second Alliance Trusts, for instance, is less than 0.4 per cent per annum.
As for ensuring that investors' interests are always paramount, investment trusts are hugely advantaged in having independent boards of directors. Their duties range from objecting to any unjustified increases in fees, to keeping a close eye on the manager. If he/she fails to perform, the board can demand a change of personnel, or even move the trust to a different investment house. Investors in unitised trusts have no such independent champion.
A decade or so ago, a lot of investment trust boards seemed moribund, stuffed with elderly City insiders who seldom showed their teeth or sacked the managers. This has changed dramatically, and over the last couple of years some of the biggest trusts in the industry have held 'beauty parades' to choose new managers. This is helping to keep the rest of the industry on its toes.
Trusts in the global growth sector tend to have the lowest running costs
If investors are looking for a long-term trouble-free lockaway, then arguably they will be best served by the trusts in the Global Growth sector. These tend to have the lowest running costs, and they also have exceptionally flexible mandates. That is to say they can shift their assets between different regions of the world, as seems most apposite at the time, and some of them are also prepared to shelter some of their funds in cash or fixed interest when the outlook is uncertain.
It is, of course, essential to check out their individual characteristics. Points to watch include the strength and stability of the management team, the percentage they tend to keep in the UK, and how much they are prepared to borrow extra funds to invest. Gearing, as such borrowing is known, can add to both the risks and the rewards.
Investment trust managers offering children's investment schemes include Baillie Gifford, Deutsche, Edinburgh Fund Managers, Fidelity, F & C, Gartmore, Glasgow Investment Managers, ISIS, and JPMorgan Fleming, while the Alliance trusts, Scottish Investment Trust and Witan all have their own schemes.
Minimum monthly subscriptions range from £20-£50, and minimum initial lump sums from £50-£1,000. Most offer investors the choice of designating the account with the child's name or initials, or putting the money in a bare trust.
Bare trust involvement can have tax advantages
The bare trust option transfers the money irrevocably to the child specified, who cannot access it until they are eighteen. Its main advantage is that if the purchase is funded out of regular gifts from income, or if a lump sum donor survives at least seven years, it should be free from inheritance tax. Also, so long as the donor is not a parent, the revenue should treat any dividends or capital gains as accruing to the child. The potential snag is that the child gains control of the fund at eighteen, and could blow the lot.
The designated account option may not count as a potentially exempt transfer for inheritance tax, and may not allow any gains or dividends to be taxed as accruing to the child. But it can be more suitable if the money will be needed before the child is eighteen - for instance for school fees - or if the donor wants to retain control after the child reaches eighteen.
Look for choice of trusts and quality of management
Most children's savings schemes have no buying or selling costs, and allow investments to be moved between the trusts offered by the management house concerned. So the range of trusts on offer and the quality of the management house are two of the most important considerations.
JPMorgan Fleming's scheme offers the widest choice of in-house trusts, however Alliance Trust Savings offers even greater flexibility, as it allows investors to mix and match virtually any UK listed equity or investment trust, as a well as a selection of gilts, corporate bonds and bond funds. The quid pro quo is that ATS's First Steps scheme imposes a small charge on purchases and sales, unless the investor has at least £10,000 invested through ATS on their own behalf. In which case the First Steps charge is waived.
