Saving for your children sounds easy, yet parents often struggle to know which savings accounts and strategies are best. Furthermore, it’s filled with important decisions like deciding when they get access, what it should be used for and whether it affects your tax. This parenting lark comes with all sorts of pesky responsibilities. Like all savings plans, the earlier you start the better, however small. This guide will help you take baby steps towards improving your children’s financial future.
Imagine you could do one simple thing to ensure your child’s financial future is secure.
Even better, it doesn’t need to have a significant impact on your finances!
In this post, we’ll explore the key ways you can take to save money for your children and how to make that money grow with little or no effort.
These apply to parents, grandparents, relatives or anyone who wishes to help improve their children’s financial lot and future life options.
I’ll also give you an insight to how I save for my two young children.
Why save for your children/grandchildren?
Whilst we instinctively know this, it’s important to understand the ‘why’.
The first time you hold that precious bundle of joy on your arms, you’re overcome with happiness and emotion. Gradually, that dawning realisation creeps upon us and we suddenly realise that these things cost money.
Like, a lot of money. The kind of money that would make you child-free friends’ eyes water and if you told them, they would laugh in your face as they booked their next holiday to the nearest Sandall’s resort.
Research shows that caring for a child in the UK until they’re 18 can cost from between £75,000 to £187,000 in the UK.
However, planning early or at least even having a plan for the big-ticket items can make all the difference. Typical expensive events or items could include:
- Education fees
- School trips
- Driving lessons
- First car
- First home
All of these expenses could put stress on your personal financial future, so why not have a plan and have money in your back pocket at the ready?
Should I even save for my children?
Do you believe kids should be self-sufficient or do you want to provide a financial comfort blanket to ensure your kids never have to worry about money? That’s a very personal question and you could sit somewhere in the middle.
The stark reality is that in today’s world, those that get a financial leg-up usually receive some sort of advantage, whether it be private education, a first step on to the property ladder or travelling opportunities. Some even receive a lump sum that is already generating an income by the time they’re 18.
None of that makes it right and doesn’t mean they’ll end up with good personal finance skills or ‘money morals’, but there it is. That’s the game we call life.
Whatever your views, it’s worth thinking about. You don’t have to decide now, but you can start to save now and decide later. Having some initial thoughts, however, is important as they will inform the type of child savings vehicle that is right for you and your family.
How can I afford to save for my children?
The great thing about saving for children is that you could have 18 years to build a financial security blanket.
Whilst 18 years is a long time, in reality, most parents delay starting until there is some spare cash.
In reality though, how often do we have spare cash kicking around with nothing for it to go towards? Just like saving for ourselves, we have to prioritise saving for our children.
Even saving £20 from one less takeaway a month (cliche I know, but relevant), when compounded over five, 10 or 20 years will make a huge difference.
When should children have access to savings?
Understanding what financial education you want to provide your children is important and again very personal.
This may also inform when you want your children to have access to any money you save for them. 16? 18? Never? It’s important to decide this, as many products will transfer ownership of the funds to the child at a certain age.
For me, I want my kids to have a balance between being financially savvy yet secure. I want them to learn how hard it is to earn money and to be financially self-sufficient. But most importantly, I want to ensure I have the financial means to help out if and when required.
Saving for children: start early, however small
The great thing about kid’s finances is that the large ticket items tend to happen around their late teens, so you have time to plan.
If you started saving £20 per month for your child after 18 years you would have £4,320 assuming you stuck it into a non-interest earning bank account. Now had you invested that money, based on typical returns you could be looking at over £7,000.
If you plan your savings from the time they’re born to having a pot available for when they’re 18, then that’s over 200 months to squirrel away.
Set up a standing order and put in the maximum you can afford each month. Even better, set this to come out of your account the day after payday so you never have to make a conscious choice to save.
Personally, I set myself a reminder every six months to review how much I put into my kid’s savings.
Many parents will look for savings or investments accounts to maximise returns as much as possible. So let’s take a look at what options are currently available.
Children’s Savings considerations
Before we get to the accounts just take a moment to consider the questions below, as they may change how you plan your child’s future finances.
Who is the legal owner of the money?
This is important, as you may not want your child to take control of the money when they turn 16. They may not be able to spend it until 18 but at that point you no longer have control. Consider how responsible you feel your child will be at that age.
Some parents may want to hold onto that cash until children are older, say if you wanted to help with a house deposit.
The thought of handing over thousands of pounds to my future 18-year-old son scares me! I want something I can control.
The flip side is that getting a chunk of money at a young age is a good way of training children how to handle money and potentially how to deal with a larger amount when their inheritance lands.
The choice is yours
Have you considered tax?
If you think kids don’t have to pay tax, you are incorrect.
Children have a personal tax allowance like adults, however, there is a catch. If in a single tax year, a child earns more than £100 of interest on money given by a parent then HMRC wants to know. Anything over the £100 threshold will be taxed at the parent’s tax rate.
The £100 rate does not apply if:
- Money is in a Junior ISA or Child Trust Fund
- Money is given by grandparents, relatives or friends
This is basically a way to stop parents from sheltering cash in their children’s names.
Here is a link to the official government site on this
Children’s savings options
We’ve got four (OK three) main categories of children’s savings vehicles to consider:
- Children’s Savings Account
- Junior ISA
- Premium Bonds
- Cash under the mattress (only joking – DO NOT DO THIS!)
Children’s Savings Accounts
The easiest and safest place (though arguably Premium Bonds are even safer) to store your offspring’s future wealth is in a savings account specifically designed for children. A children’s savings account can be easily set up and is available from most main-stream banks.
- Typically controlled by the parent or legal guardian until they are either are 16 or 18
- Parents can withdraw the money if required.
- Others such as grandparents can pay into an account by a bank transfer
There are two types of children’s savings accounts.
- Regular Saver
- Easy-Access Saver
1. Children’s Regular Saver Account
Regular Saver Accounts require parents or grandparents to commit a fixed amount of money per month in return for a higher rate of interest.
If you miss a month or want to withdraw the money, you will usually miss out on the higher interest rate.
They often have conditions on the amount of withdrawals (such as once per year) and some do not allow withdrawals at all within the term.
Consider these for more medium to long-term savings, perhaps such as further education or a car in ten years time.
One of the best Children’s regular savings accounts currently is from Halifax. It’s limited to £100 per month and is fixed for 1 year. While the headline rate of 4.5% sounds great, the reality is we are talking about a maximum of £29 interest over the term!
When looking at regular savings, don’t necessarily be swayed by larger headline rates of interest. There is a personal cost to chopping, changing and managing savings accounts each year.
2. Children’s Easy-Access Savings Account
Easy-Access Savings accounts usually offer a slightly lower rate of interest, but they do allow withdrawals without penalties. There is also usually an upper limit to which the interest is applied.
Due to their flexibility, they could be considered a type of ‘working savings account’, rather than for long term purchases, and as such are often a wise choice if you need to regularly access the funds, such as for school trips or clothing.
Currently one of the best Children’s Easy-Access account is the Nationwide Future Saver. It allows you to save up to £5,000 per year and rewards you with 3.5% interest. Watch out though, as you are only allowed one withdrawal per year if you want to keep the 3.5% interest. Putting in £5,000 when the account opens would return £175 in the first year.
Check the terms when opening an easy-access savings account as initial high rates of interest may be lost after the first year. Ideally, you want to “set and forget” your child’s savings. Chopping and changing accounts can add to your life admin. If you have kids, let’s be honest, you probably don’t want the hassle.
Best Children’s Savings Accounts
The best rates for children’s savings accounts can be found here.
Are children taxed on their savings?
It may surprise you, but children are also subject to tax just like the rest of us.
You need to tell HMRC if the child earns over £100 in interest on money given to them by a parent.
HMRC also need to be informed if the child earns more than their personal allowance, such as from a Trust.
Grandparent, relatives & friends don’t have this to worry about the £100 limit. For grandparents, in particular, this may be a nice way of reducing your inheritance tax by passing on money early.
Similarly, Junior ISAs and Child Trust Funds are also excempt frpm the £100 limit.
Am I taxed on my children’s savings?
You will have to pay tax on all of the interest earned if it is above your own personal savings allowance.
If you want to avoid the tax implications, then consider our next contender…….
Junior ISA (JISA)
A Junior Individual Savings Account (JISA) is designed as long-term, tax-free savings accounts for children.
This means that the interest or gains the account makes is exempt from tax.
This tax-free benefit can be very powerful over the long term and not having to worry about declaring the tax is also a boon.
There are some key things to consider though:
- Your child must be under 18 to open an account
- Living in the UK
- Maximum of £4,368 can be saved/invested (year 2019/20)
- You cannot have a JISA and a Child Trust Fund
- Parents manage the account until 16
- At 16 the child takes over account management
- At 18 the child can withdraw money
There are two types of Junior ISA:
- Junior Cash ISA
- Junior Stocks & Shares ISA
A Junior Cash ISA works like a normal savings account, however, you pay no tax on any interest you earn. Like the savings account mentioned above, you can get fixed and regular savings rates of interest.
A Junior Stocks and Shares ISA allows you to invest your child’s money in stocks, bonds, funds etc. While stocks and shares are seen as a riskier investment, over time they have proved to return greater results than cash savings.
Given many parents open a Junior Stocks and Shares ISA for their children and not expect to use it for 18, 20 years etc, which is generally long enough to increases the likelihood of riding out market crashes and corrections.
Be warned though – the value of your child’s savings can go down as well as up when investing.
Unlike savings accounts, Junior ISAs do not have the £100 threshold on interest earned. Therefore parents can invest money for a child without any tax concerns.
Click here to read our Ultimate Guide to ISAs.
The problem with Junior ISAs
One of the major considerations you have to decide on with a Junior ISA is whether you are comfortable with your child having access at 16 and control at 18 years old.
For me, this is why I have not opened a Junior ISA for my children. Mainly because I know what I was like at 18……!
Spending the last 18 years saving for your children only to see them blow it on cars and parties may be a very bitter pill to swallow.
There is also the counter-argument that this is a good opportunity for children to put into practice what you have taught them about money and financial responsibility.
So are Junior ISAs actually worth opening?
Well, each parent is allowed to invest up to £20,000 per year in an ISA under their own allowance. If you have not filled your own allowance it may be better to use this first. If you exceed that limit and have cash left over, then a Junior ISA may be a neat way to further access tax-free savings.
Personally, my children’s savings are invested in my own personal Stocks & Shares ISA. I buy a different fund so I can track it separately. This allows me to leverage the tax benefits, whilst keeping control. I can then choose at which point I need to help my kids and how much they should get, based on the situation at the time.
Premium Bonds for children
Due to their history, being backed by the Government and with over £75 billion invested, Premium Bonds are a firm favourite with grandparent’s saving for grandchildren.
Each pound invested in Premium Bonds is entered into a lottery that is drawn once a month. There no interest paid on the money but there is a chance to win cash prizes. Unlike a lottery, your pound is entered into every monthly draw until you withdraw your cash.
- Minimum £25 purchase
- Maximum £50,000 investment per child
- No interest paid
- Monthly chance of winning cash
- Guaranteed by the UK government
- Winnings are tax-free
Premium bonds can be purchased by parents and grandparents for children with a minimum deposit of £25.
Premium bonds are guaranteed by the UK Government, so there is unlikely to be a safer place to keep your child’s money.
The major drawback is the chances of winning are seriously low. Statistically, you would be far better off with a decent savings account. In the past decade, only five children have scooped the £1 million jackpot.
Here is the link if you would like to invest or gift Premium Bonds
Saving for children can be easier than you think. The key is starting early even if small. What’s really important though, is that these decisions force us to consider how we will educate our future generations about financial responsibility, and that is priceless.
EatSleepMoney.co.uk does not offer financial advice and is intended for reference/information only. Remember, you should always carry out your own research and/or take specific professional advice before choosing any financial products or services or undertaking any business or financial venture. Investments may go up as well as down and you may get back less than you put in.
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