How Can I Save for my Children’s Future?
Saving for a child’s future can give them a valuable head start when they become adults and want to go off to university, buy their first home or car or travel the world. What’s more, involving children in saving for their future helps to teach them about the value of money and the importance of saving.
There are many options to consider when thinking about the best way to save for your children.
Children’s Savings Accounts
Most banks and building societies provide accounts that you can set up on behalf of a child up to the age of 18, starting with as little as £1. Once they reach the age of seven they can start managing their own account, which can really help teach them important life lessons about money.
Some accounts are set up so that children can’t withdraw money until they reach a certain age.
There are two main types of children’s savings accounts:
- Instant access (also known as easy access), from which you can withdraw money at any time. These normally offer a lower rate of interest than other types of account.
- Regular savings accounts are designed to help children save money every month. They usually pay a higher rate of interest than easy-access accounts, but if you withdraw money from it within a set term it may reduce the interest rate.
Comparison websites can be useful to help you find an account to suit your need.
Piggy Bank
Encouraging a child to save money in a traditional piggy bank can help teach them that money needs to be kept in a safe place. You can teach them about the value of different coins and notes and help them practise adding and subtracting.
If you give them regular pocket money, it’s a good idea to set them a small chore or responsibility that they have to complete to earn it. They can then decide to save up for something they’d like, and it can help them to understand that sometimes it takes a while to save up enough money for things, and that once it is spent you have to start earning and saving again.
Junior Cash or Stocks and Shares ISAs (Sometimes Called NISAs)
With Junior ISAs the savings belong to the child, but a parent or guardian must open the account on their behalf. The child cannot access the money until they are 18, so it can be a good way to gather a nest egg for them to take into their adult life.
A Junior Cash ISA operates in the same way as a regular savings account, but there is no tax payable on the interest that is earned.
Junior Stocks and Shares ISAs let you buy shares, bonds and other eligible investments on behalf of a child and are a tax-efficient way of saving because the investment is exempt from Capital Gains or Income Tax. Always remember that the value of these investments can go down as well as up. As with a Junior Cash ISA, the money is locked away until their 18th birthday.
There is a limit to how much you can save with a Junior ISA. For the 2019–2020 tax year, the limit is £4,368.
If the child is aged 16 or 17, they can take out an (adult) cash ISA and save up to £20,000 a year, as well as up to £4,368 in a Junior ISA.
Friendly Society Tax-Exempt Plan
These children’s savings plans are only available through Friendly Societies, which are mutual benefit organisations owned by their members to work for the advantage of those members.
You can choose to pay into the plan for between ten and 25 years, and money is invested in a share-based investment fund for the term length you choose. The maximum amount you can pay in is £270 a year, or £300 a year if you pay in £25 each month. This is in addition to your annual ISA allowance.
On the maturity date, the child must be at least 16 and you must have paid into the plan for a minimum of ten years.
As with any investment plan, the value can go down as well as up. Friendly Society policy charges also apply, but as long as you pay into the plan for a minimum of ten years, your child won’t pay Capital Gains and Income Tax on any gains or income.
Child Trust Fund Accounts
Child Trust Funds were replaced by Junior ISAs in 2011, but if your child was born between 2002 and 2011, they might have a Child Trust Fund (CTF). These funds can now be transferred to a Junior ISA for you to continue to add to, or simply left where they are and accessed by the child when they turn 18.
NS&I Premium bonds
With Premium Bonds you’re entered into a monthly prize draw where you can win between £25 and £1 million tax free. On average, 1 in 3 people who make a £1000 investment win a prize each year. The scheme is backed by HM Treasury, so the money you invest is 100% secure.
You must be at least 16 to purchase Premium Bonds and the minimum investment is £25. You can buy them for yourself or on behalf of your child, grandchild or great-grandchild up to a maximum of £50,000.
Child Pensions
If you’d prefer to save for your child beyond the age of 18, you can set up a pension on their behalf. They’ll only be able to access this pension money when they reach 55 years old and any growth in their investment is exempt from tax.
Any parent or legal guardian can set up a pension on behalf of a child, and it will automatically transfer to your child once they reach 18. They can then start to contribute to it themselves.
You could save up to £2,880 tax efficiently each tax year with the government automatically topping up any contribution by 25%. You can save more than this amount each year if you’d like to, but the government contribution stops once you hit £2880 for the year.
As with any investment, remember that the value of the pension fund can go down as well as up.