Planning for your child's future (page 2 of 2)

However, the most common reason that parents establish a savings plan for their child is to save towards future education fees and they do this by building a 'pot of money' over time with a regular contribution savings plan.

A child's plan, through saving a small amount on a regular basis, offers parents the potential to earn real growth on their savings. Most children's savings plans are flexible enough to allow the parents to alter or suspend contributions as unforeseen expenses arise and draw money from the plan as school or university fees are due.

As children get older, investment principles can also looked at. For example, by investing regularly over a long period of time the principle of 'Dollar Cost Averaging' can be used to show that fluctuations in stock markets (as we have recently seen) will be of benefit to the investor long-term.

This offers two valuable lessons: 1. Buy low or invest extra in falling markets and 2. Do not take drastic action or panic in times of market volatility; whilst things looks bleak on interim valuations, the downturn will not last forever.

Such policies may also give grandparents a means to actively contribute to their grandchildren's future. Many grandparents really want to do something for grandchildren but do not know how to or they do not have the means to do so solely by themselves. Indeed, for grandparents domiciled to countries where there are death taxes, such policies prove an excellent way to pass money on to future generations tax-efficiently.

How to save

There are a wide variety of policies available which can be used as children's savings or education fee plans. These can be simply broken down into those which are funded from capital and those that are funded from income. Either way, the current economic downturn makes this a very good time to invest. Planning ahead is more important than ever, and saving as much as possible, even if this is little and often, could help to ease future financial pain.

Funding from capital
If capital is available to invest for education expenses (perhaps from generous grandparents!) tax efficient investments can be used to maximise the return on this capital. Such investments, often known as offshore bonds, can be established with $22,500 or more. The investment return is partly dependent on the length of time before fees have to be drawn down, so the sooner you start the better.

Funding from income
The benefit of saving for a child's education is that the investment is generally for the longer term (more than 10 years) and very often made on a regular basis. When saving smaller regular amounts, the best way to invest is through an offshore savings plan. A good regular contribution policy will allow the parents to reduce or increase the contributions that they make, and take withdrawals or payment holidays if required. This means that the parents can change the plan to meet their changing lifestyle; which is crucial for it to work over the long term.

And, contrary to popular belief, the parents do not have to invest huge sums to make a difference. By choosing to pay the minimum monthly contribution (often as low as $150 per month), and based on an 18 year term, the pot could be over $51,000 assuming an average growth rate of 5% per annum - which could substantially ease the burden of education costs or make a huge difference to the child's start in adulthood.

Both the lump sum and regular contribution products provide access to pooled investment funds which allow the policyholder to invest in a wide range of equities and other securities such as commodities and bonds.

These funds may be actively managed - where a fund manager picks individual stocks based on a view of their future potential - or passively, where a manager invests in all the shares that comprise a stock market index, such as the FTSE 100 or the S&P 500.