How to save for your children

From before they’re even born, children are expensive! But as they grow up, these costs are likely to get bigger and bigger. Driving lessons, first car, university, weddings, first home…that’s a lot of money to find.

If you want to help your children get off to a strong financial start, it’s a good idea to start saving for them as early as possible. Time is a powerful ally of an investor. Longer time-scales allow for greater risk-taking, and therefore higher potential returns. But it’s the power of compound interest, where profits are re-invested each year, that can really make a difference.

If you can invest £100 a month for 18 years, at a rate of 5%, your child would have just under £35,000 stashed away come their 18th birthday.

When deciding how or where to save for your children’s future, there are three main things to think about.

1. Tax

Did you know children are liable to tax, just like everyone else? Just like everyone else they have a personal tax-free allowance of £12,500, and £12,300 capital gains tax allowance (2020/21 tax year). So they’d have to be earning significant amounts of interest to have a bill in any tax year! Something to think about though.

A Junior ISA (or JISA if you’re into that sort of thing) is an obvious choice because it’s completely tax free. The current savings limit is £9,000 (2020/21 tax year) which can be in cash, stocks and shares, or a mixture.

Child trust funds are tax free too. A trust is a legal arrangement where one or more trustees are made legally responsible for holding assets (land, money, shares, antiques) for beneficiaries – in this case, your children. There are no contribution limits, making them particularly useful for passing on money early to limit inheritance tax – another consideration.

However, there’s another quirk to watch out for. With some saving plans, if a child earns more than £100 interest in a year on money gifted by a parent, that income will fall under the parent’s tax regime.

2. Access

Different savings options give your child (and you) different access to their money. You need to think about when they might need that money, and how much you trust them to be responsible with it!

Once money is tucked away in a Junior ISA, it can’t be accessed until the child turns 18. They are then free to do what they want with it (eek!). Money left in the account will automatically be transferred to an adult ISA with any interest remaining tax-free.

With a Trust, until the child is 18 the trustee can manage the investment, including withdrawing money, as long as it is to the benefit of the beneficiary. At 18 (for most trusts), the child has absolute access to the money.

NS&I Premium Bonds are sold in batches, or issues, that run for five years. At the end of each five-year period, the issue can be rolled over, until the child’s 16th birthday. If you need access to the money before the end of the five years, you’ll face a penalty.

A regular savings account will give most flexible access, but again, responsibility for the money will pass to the child at 18.

Of course, if you save for them into your own ISA, you retain control of the money and can access it at any time, if they need it for driving lessons for example. But remember, your child has no legal right to that money. Make sure you take that into account in your will.

3. Potential return

If you start saving for your children when they’re born with a view to them needing the money around the age of 18, or later, it should be treated as a long-term investment. As such, there are a few things to bear in mind.

Because interest rates are currently so low, you may find it difficult to find a cash junior ISA that pays interest higher than inflation. Effectively, you could be losing money in real terms. Stocks and shares ISAs tend to be more volatile in the short term, but overall they tend to offer a better long-term return.

Premium bonds – where each bond goes into a monthly draw with chance to win between £25 and £1m – could offer a great return. But only if you win! You may, of course, get nothing. With NS&I Premium Bonds, on the other hand, the interest rate is guaranteed so you’ll know exactly how much you’ll earn at the end of the five years.

Current rates on regular savings accounts are pretty dire, so this isn’t a good option for the bulk of your child’s investment.

There’s one other very long-term investment option which you could consider – a child Self Invested Personal Pension…more on that in our next blog post. 

So what’s the best option?

You should be used to us saying this by now…but it really does depend on your individual circumstances. A combination of options is usually the best way to grow your investment safely. We’re happy to help advise.

A word of warning too. Saving for your child should go hand in hand with some solid financial education.

Any account held in your child’s name becomes theirs to do what they want with at 18. They need to understand the importance of being responsible with that money before they can get their hands on it and ruin all your hard work! A regular savings account with limited funds can be a great way to get them interested and involved in managing their own money.

Want to know how you can help your child become a millionaire? It might be easier than you think!

Please note: this article was first published in July 2017. It was last updated in October 2020.

The value of investments and income from them may go down. You may not get back the original amount invested. Some funds will carry greater risks in return for higher potential rewards. Investment in emerging market funds can involve greater risk than is customarily associated with funds that invest in developed, more established markets. Above average price movements can be expected and the value of these funds may change suddenly.

The property market can be illiquid; consequently, there can be times when investors in property funds will be unable to sell their holdings. Property valuations are subjective and a matter of judgement.

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