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How to save for your child’s future
Every parent wants to give their child the best possible start in life and all the opportunities perhaps they never had. As a result, saving for your child’s future is a big, important decision that all parents grapple with at one point or another.
How much money should you save? When should your child be allowed to access it? When should you add to it? And where exactly should you put the money?
The last question is possibly the most difficult as there are so many financial products on the market to save for your children. It can feel overwhelming and difficult to make the right choice.
Therefore, we have put together a few options to describe exactly what they do. However, if you need more information about the products or advice on them, get in touch with an independent financial advisor (IFA).
Children’s Saving Account
These are potentially the easiest to understand and simplest to open product of them all. You can set up a savings account for a child at most banks and building societies with as little as a £1 deposit.
Children can manage these accounts on their own as soon as they reach the age of seven, if deemed appropriate by yourself. If you do decide to let your child manage their own finances, it is a great way for them to learn how to manage money and get into the habit of saving.
Over time, these accounts add on interest to the money you or your child puts in, dependent on the stated account interest rate. Before opening an account, you should check comparison websites and do your research on which one may offer the best package for you. Some accounts for children offer gifts and incentives that could be of use to you. For more information regarding Children’s Savings Accounts, visit the Money Advice Service website.
Much like ISAs for you and me, there is the option of a cash or stocks and shares ISA for children. Any UK child under 18 can have an ISA, however if you child has a trust fund you cannot have both. You can transfer the trust funds monies into the ISA on opening though.
Cash ISAs are a good option as you pay no tax on the interest accrued on the savings invested. While Stocks and Shares ISAs are tax-efficient, this is because your investment is free from any liability to Income Tax and Capital Gains.
The children’s Stocks and Shares ISA lets you buy shares, bonds and other investments on behalf of your child. Although, like other investments, beware that they can go up and down.
Parents must be the ones to open the accounts but the money ultimately belongs to the child who can only withdraw the money after turning 18. A child can have one of each ISA on offer during childhood though the ISA limit is £4080 currently.
Children’s ISAs don’t work in the same way as adult ISAs as they don’t work on an annual contract and work more like a savings account. Although, they are tax-free and the money is locked away until the age of 18. You can find out more about Junior ISAs here.
Or use your own ISA
If you want to stay in more control of your child’s savings, you can use your own ISA tax-free allowance to save for your child’s future. This way you own the money and only give it to your child when you feel like yourself and they are ready to use the money responsibly.
You can save much more in an adult ISA, up to £15,240 per annum. You can also have a mix of ISAs which would be perfect for having an ISA for yourself and one for your child. Though beware you will have to split your ISA allowance between both accounts.
You can also take withdrawals out of adult ISAs which is perfect if you want to give your child some money out of the account on their 18th birthday but don’t want to give them the full amount yet. You can find out more about ISAs and how they work on the Gov.UK website.
When it comes to bonds, like the NS&I children’s bond, they are held by an adult until the child turns 16. A parent, guardian or grandparent can buy the bonds but the child does own them.
Bonds are sold as batches known as issues, each one runs for 5 years. Each issue has its own fixed interest rate and interest is added at the end of the year. At the end of the 5 year period, you can roll over the issue into a new five year period.
Investments start at just £25 with a limit of £3000 per issue. All interest on issues is tax-free, so monies made is safe within the bonds. For full details of NS&I produces, visit their website.
Any child born between 1st September 2002 and 2nd January 2011 qualified for the Government’s Child Trust Fund scheme. However, from April 2015, parents can transfer savings in Trust Funds to Junior ISA accounts.
Trust Funds are becoming less and less popular due to them transferring across access to your child at the age of 18 automatically.
The Government Trust Funds allowed a set amount (up to £4080 in 2015-16) as a choice of cash or investments. After the changes made in April 2015, Junior ISAs have overtaken Trust Funds as a popular choice that has more options and suits parents needs much better. There is more information about Trust Funds for children here.
Start a pension
A lot of people don’t start thinking about pensions until they start work in their twenties, or even later. You can get your child ahead by opening up a pension for them. This would mean your child cannot access funds until retirement but it does help to avoid any reckless spending that could occur.
The annual limit for this type of pension is around £3600 and works slightly differently to other options. If you pay in £2880, the Government tops it up with tax-relief to £3600. Meaning it works much in the same way as adult pensions where you pay in and so does your employer.
This is a more long term approach to planning for your children’s future as money is locked away until pension age. However this is not going to be a good option for parents who may plan on giving savings to children to help pay for a wedding or buy a house. Discover more regarding how to set up a pension for your child on the Moneywise website.
There are many options on the market that will help you save for your child’s future, some more long term than others.
There’s plenty of research to be done before settling on a product and you should discuss these products with a licensed financial advisor for more information. Ultimately though it is up to you to decide which one works best for you and your child.