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I have about £5000.00 that I want to lock away for my daughter when she is older. The problem is that with interest rates so low this money will evaporate in an average savings account or worse in ISA.

What options do I have if any if I want to avoid anything that is tied into stocks and shares.

  • How long will you put the money away for? – Chris W. Rea Sep 19 '11 at 12:30
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    She is only 1 year 6 months old now so we want it for when she is 18. It can go towards university or something like that perhaps. – dagda1 Sep 19 '11 at 12:32
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I would suggest your next best option after stocks and shares would be a mutual fund that tracks a major benchmark bond index. Look for something with a low MER (definitely below 1%, hopefully around 0.50%). I am not specifically recommending this mutual fund, particularly because you are not in Canada, but something like the TD Canadian Bond Index fund would be worth considering. There will be British alternatives. You could hope to see somewhere around 5 - 6% annual growth, so it's not going to make your daughter rich (don't forget, there's inflation that'll eat away at your savings). That return is, of course, not guaranteed and you may actually lose money.

If bonds are too much risk for you, you need to look at a money-market mutual fund. You will generally see returns slightly higher than a savings account but lower than a bond-index mutual fund. The risks are only a tiny bit higher than a savings account (but the interest is also only slightly higher).

Before you take this advice, wait until someone in the UK posts about investment opportunities similar to Canada's education savings plan. In Canada, the government will match some part of your contribution, and the money can compound tax-free. I'm not sure what similar options are available in the U.K., if any.

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Does your daughter have a Child Trust Fund account already? If so then you could do worse than add to that.

http://www.direct.gov.uk/en/MoneyTaxAndBenefits/ChildBenefitandChildTrustFund/ChildTrustFund/AnintroductiontotheChildTrustFund/DG_193690

You could also look at NS&I index linked bonds.

Broadly, you have two choices: invest in something relatively secure (ISA or standard savings account) and get relatively low returns, or invest in something riskier (stocks and shares) for higher returns.

Also don't forget that if you gift the money to your daughter, if it earns more than £120 (? I think) in interest per year then that interest will be taxed as your income.

  • NS&I index linked bonds are currently off the market. They might come back next tax year. – Ganesh Sittampalam Sep 20 '11 at 15:57

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