For this, the second blog in my series about investing for a child’s future, I will start by talking about good old cash savings. In the past a child would select the bank or building society that had the best ‘gift’ offer at the time – remember the National & Westminster series of piggy banks?

With the advent of internet banking the choice of a home for cash has expanded radically to the point that making the decision on where to save can be very difficult and time consuming. Furthermore, many institutions invariably offer attractive initial deals that include a ‘bonus’ rate of interest for a limited period – normally a year. The problem is, if you select one of these accounts you really do need to review its legitimacy at the end of the bonus period. With interest rates being maintained at an all time low and inflation touching 5% it is very easy to fall into the ‘inflation risk’ trap if you don’t save wisely. 

This point is amply proved by conducting a quick search on ‘MoneySupermarket.com’ which promptly offered a choice of 1200 accounts. The current top rated account is offered by the Post Office with its ‘Online Saver’. It offers 2.90% gross which includes a 1.25% bonus for 12 months. If you leave a child’s savings of let’s say £1000 in this account beyond the 1st year you will receive £16.50 interest. Even if the account continued to offer 2.90% the return is still a paltry £29.00. I am sure you’d agree that this return is a pittance and that ideally you need to make your child’s savings work harder, especially if the investment is going to be added to by regular gifts from family and held for any time period; beyond 5-10 years. Invariably, through, this will include taking ‘more risk’.

The other popular ‘home’ for cash for a child is National & Savings Premium Bonds. Indeed my daughter’s grandparents purchased her some when she was born. Currently UK residents hold £42 Billion in premium bonds. That is a considerable amount of money but are they worth holding? Closer examination reveals that the prize fund available annually is 1.5% of the overall funds available. This means your ‘best’ rate of return is also equal to 1.5% but as we know there are winners and losers, some (very few) are likely to win the larger monthly prizes but others may win nothing. At the end of the day it is a numbers game but I am sure you’d agree that a return of 1.5%, if you have your fair portion of wins, does not represent a fair return for your money. It strikes me that the only winner here is the Government who are affectively borrowing our money at an incredibly cheap rate of interest. 

So what else is there? At the end of the month I will be reviewing Unit Trusts that invest predominately in UK equities.