In today’s economy, you may be considering putting some money aside for your children so that they can have a great start to their adult journey. There are, however, hundreds of ways that you can save for your children, so we’ve put together this guide to successfully saving for your child’s future; ensuring that we’ve done all of the research for you, so you don’t have to.
In this guide, you’ll find information on everything from trust fund accounts to child pensions to premium bonds. From future nest eggs to actively teaching children the important financial lessons, there is a range of different options you can choose from. Read on to discover the best opportunities for you and your children.
Why save for your children?
Did you know that raising a child until the age of 18 costs parents an average of £231,000? However, this doesn’t include all the expensive considerations such as driving lessons, a car and insurance. It also doesn’t cover the cost of university and living expenses. Furthermore, the Bank of Mum and Dad is often needed for the first house purchase too. In fact, 300,000 homes are bought per year using help from parents. More than half of these are gifts from parents rather than borrowing.
With all these expenses, planning ahead is essential. For those who start saving little amounts regularly can see high returns when the high-cost purchases roll around. Free cash, high-interest and tax incentives are available to help with saving for children. However, different campaigns can be confusing, so it is essential to know all of the implications before you potentially lose out.
As well as saving for your children, don’t forget about life insurance. Sadly, around 23,000 parents of children under the age of 18 die each year. Life insurance can protect their future and the income of your family if you die.
Different saving options for children
Children’s Savings Accounts
Let’s start with the obvious one. Children’s savings accounts are everywhere, and they’re very accessible to parents who want to put a little cash aside every month for their child. Children’s savings accounts are opened by or for a child under 18 years of age.
Most banks and building societies will offer a children’s savings account, which means you’ll be spoilt for choice if you decide to go looking for one. Each will provide lots of benefits and special offers, so be sure to conduct comparisons and shop around for the best deal.
Children’s savings accounts often have a slightly better interest rate than adult savings accounts. There are several variations of a children’s savings account; you can choose from a range of savings solutions, including:
- Instant access savings (where you can take money in and out as often as you’d like)
- Regular savings (allowing you to save on a monthly basis)
- Fixed term savings (bonds where you lock away the savings for several years)
- Junior ISA (a limited account where you can pay in each tax year, and the child has no access until they turn 18).
As mentioned, most bank and building societies will offer some form of children’s savings accounts. You’re likely to come across all of the ones named above at some point. Something to bear in mind: Children’s savings accounts aren’t taxed, but that doesn’t mean they’re tax-free. To ensure that your child’s savings remain tax-free, there are two things you can do:
- Ensure that the interest earned from savings does not exceed £100 from savings secured by the child’s parents or legal guardians
- Ensure that the interest earned from savings does not exceed £1000 from savings secured by anyone giving money to the child (friends, relatives, parents, siblings, etc.)
Children do not control their children’s savings account unless it is opened solely in their name. A children’s savings account can be opened in the child’s own name from their 7th birthday, but not before. If your child is responsible for their own account, it will be like every other kind of savings account. They’ll have bank statements, be responsible for signing documents on their own behalf, and they will be the sole overseer of the account; meaning that you, the parent, will not have access.
Most children’s savings accounts can be opened with as little as £1. The best way to think of a children’s savings account is like a piggy bank or money box that your child can access when they turn 18 (unless you let them have sole rights to the account). By doing this, you’re teaching your child how to handle money, yes, but you’re also ensuring that they can feel a little more independent and self-reliant once they turn 18.
Turning 18 is a big deal, especially in the UK, because that’s the time of a young person’s life when they are most likely to be in full-time, optional education, which they have chosen to further their career paths. This little savings account could be the difference between how they spend their time, and how much they have to worry about finding other income allowing them to enjoy and make the most of their education if they choose too.
You should shop around to find the best bank or building society to open a children’s savings account with. Only open accounts with reputable banks and building societies, and don’t inquire with places that have bad reviews, or that you’ve never heard of. You can check from the credibility of the bank by checking if they are registered by the Financial Conduct Authority.
Remember, there are two main types of children’s savings accounts. Instant access, and locked accounts. Instant access accounts will allow you to dip in and out of the account at any time, but locked accounts (like ISAs, regular savings, and bonds) will only allow you to save at certain times, and your child won’t have access to the money in the account until they turn 18.
When a child turns 16, they have the option of paying money into an adult ISA as well as their Junior ISA, which means that they’ll be able to benefit from the allowance of both ISAs until they turn 18; a significant investment to make.
ISA to NISA
NISAs were announced in 2014 as the “New ISA”. They are a kind of tax-free savings account that expands the limit of the original ISA. The old ISA separated savings limits between various financial products (stocks, shares, cash), which worked well for stock investors, but not so much for cash savers.
With the NISA, you can transfer your old ISA stocks and shares in cash in a NISA. This means that the amount you can lock away into an ISA each year has increased, and you’ll quickly find that you can save much more than before without being taxed.
NISAs do not affect Junior ISAs negatively at all. In fact, thanks to the new savings rules of the NISA, you can now save more in your child’s ISA. Both ISA and NISA are used interchangeably when referring to ISAs because all ISAs were updated back in the 2014/2015 tax year.
For 2018-2019, the Junior ISA limit is £4,260 while the NISA can be used to save up to £20,000 per year. Parents who can save £10 a month in an ISA with 2% interest would create a nest egg of over £2,500.
Trust Funds and Junior ISAs
A child trust fund is a type of savings account which is a long-term investment into your child’s future. The CTF (Child Trust Fund) isn’t used in financial practices anymore. In fact, you’ll find that most CTFs started changing over to Junior ISAs or a similar equivalent back in 2011 (when CTFs were discontinued).
CTFs were initially introduced to ensure that every child had savings at the age of 18. They could then access those savings to help them take their first steps into adulthood and decide what they want to do with that money. CTFs were there to teach children the value of saving and help them understand how personal finance works.
If your child still has a CTF, you should find out where it is and transfer it to a Junior ISA as soon as possible. There are still millions of pounds in lost CTFs, so it could be worth looking into to see if you can find your child’s paperwork.
Since 2015, parents have been trying to find a new type of savings account to replace the CTF. The best one available that is the most similar to a CTF, is definitely a Junior ISA. The interest rates for Junior ISAs are higher than CTFs, there are more Junior ISAs to choose from in the financial market, and there is a much wider range of investments to choose from. Obviously, the Junior ISA is the smart choice to switch to if you haven’t already.
Before switching to a Junior ISA, it’s vital that you check the current value of your child’s trust fund. You should also check if there are any exit fees or guarantees that you might lose if you switch accounts. There are several other steps you’ll need to take to change:
- Explore provider options at different banks, building societies, and financial providers
- Gather the details of the CTF
- Complete a Junior ISA transfer form
- Let the new provider carry out the switch.
It’s a simple procedure if you know who your current CTF is with and still have the paperwork; if not, it can be more difficult to switch.
Another way to support your children is through child tax credits. Child tax credits work to help you, and the amount you may receive will depend on your circumstances. There are two options for the potential pay outs; child tax credit and working tax credit. Check if your eligible for either and you may receive additional support.
Children’s bonds are no longer available. However, you can still purchase premium bonds for children. Premium Bonds are a specific type of alternative investment. You’d usually invest at least £100, but you’re also entered into a monthly draw where you can win up to £1 million tax-free as a prize. Around 1 in 3 people win a cash prize with Premium Bonds each year when they invest (with bonds of £1,000), and you can keep buying bonds for your child until you reach £50,000.
Premium Bonds are a great alternative to buying presents or giving children money. It would be an investment with a great return if you were to win. With Premium Bonds, you’d also be able to teach your child about responsibility, because they’d need to keep their investment details as safe as possible in case they win a prize draw one month.
All winnings are completely tax-free, but there isn’t a guarantee that your child will win any of the prize draws. Furthermore, you can also take your money out of Premium Bonds. However, you will not receive interest, so if inflation rises, the money you draw out may not be worth as much as when you put it in. With this, sometimes it is better to keep the money in the bond so at least you have a chance of winning.
While there is no interest rate, a five-year renewable bond has a prize interest-rate of 2.5%. However, remember that you may not be lucky and it is no guarantee, just a probability.
We’re sure that it sounds strange, building up a pension for your baby or toddler, but it’s actually become a rather popular practice for parents looking to put aside money for their children’s future. By starting a pension early, your child will always have money put aside for when they decide to retire from work. This could even mean early retirement if they have a notable amount put away in their pension.
Because you’re starting their pension for them, your child will be able to add to the same pension once they start working, which will keep it all in one place. Pensions are a great way to invest in the future of your child long-term, so they’ll have a comfortable retirement after you’re gone.
You can put £2880 in your child’s pension each tax year, which is then built up with tax relief to £3600. The pension is handed over to your child once they reach 18, but they won’t be able to withdraw the money in it until they retire. Any legal guardian can set up a pension.
Some institutions and broker may charge a fee for the pension, regardless of how much it holds, so it is essential to factor in the charges of the pension and whether this will be a worthwhile investment for you.
The piggy bank is a much simpler solution to help you save money for your child without needing to open a bank or worry about taxes. A piggy bank is great for younger children who are completely inexperienced with handling money. By teaching them to save the money that you give them, you can show them what money is worth, and how each bit of money you give them adds up to a larger amount which they can choose to spend on something nice or keep saving.
By implementing a piggy bank system for your child, you’ll start giving them regular pocket money and help them understand that they can buy things that they want with it. This teaches your child responsibility. Remember to teach them how money works while you’re giving it to them, or they might just hoard it away, rather than learning how to spend it wisely.
However, it is essential to teach your children about interest. With a piggy bank, they will only save as much as they put in, but with a bank or savings account, they could receive more money through interest. The key decision for kids will be whether they want to access their cash instantly or whether they would be willing to wait a bit longer and enjoy a bit more money because of it.
Getting children to write a savings list and keeping it next to their piggy bank is a great way to teach kids about the value of saving. Once they have a goal to visualise what they want, your children may think twice about frivolous items and be more committed to saving for something that they really want.
Best savings accounts for children
1. Halifax Kid’s Monthly Saver
Halifax offer 4.5% AER for a year. You can save from £10 to £100 per month with no penalty for skipping a month (ideal when Christmas present shopping rolls around). However, you cannot make any withdrawal during the term. You can then transfer the money to a Young Saver account after one year. This is accessible to kids from 0-15 years old.
2. Nationwide Flexone Regular Saver
Nationwide allow you to save from £1 to £100 per month with no missed-month penalties, and they also allow you to make withdrawals too. The account pays interest of 3.5% AER with interest paid annually. What more, it can link to a current account so that children can spend and save. It is open for children between the ages of 11 and 17.
3. Santander 123 Mini Current Account
This current account is open to children over 11 and pays 3% AER if the account has between £300 and £2,000 in it. It also links to a debit card which can help kids to manage their own money. For children under 11, you can still enjoy the benefits of opening an account in trust, which they can access on their 11th birthday.
4. Cambridge Building Society
For balances between £1,000 and £20,000, the Cambridge Building Society offers 2% AER that is fixed for three years. The drawback with this, however, is that you can only make one deposit and you cannot top it up. Interest is paid annually, and you cannot withdraw until the end of the term. It is available for children between 0-15 years old.
Many banks will offer a free gift to youngsters to entice them in. Make sure they understand which the best deal is; the free gift (usually a piggy bank) or the amount of interest they can make at the end of the year.
Saving For Your Childs Future
With so many ways of saving for your child’s future, you’ll be hard-pressed to find a solution that doesn’t fit the requirements you want to be met. It’s recommended, at the very least, that you open some kind of savings account for your child.
You may want to implement more than one method. For example, you could open an instant access account for them, in their sole name, to help them learn the value of money and store the money you give them so that they can save up, as well as an ISA, where they will only gain access to the locked amount when they are 18.
There are a lot of financial products on the market to cater to parents who want the best for their child’s future, and although tax is definitely something you should take into account, unless you’re planning on saving so much for your child that their interest ends up over £100, you shouldn’t run into any issues. If, of course, you are concerned about tax implications, open a tax-free ISA (NISA) for your child, and invest in bonds or give them a piggy bank at home to save a little extra.
If you and your partner separate, the money in a child’s account will belong to the child. Only in unusual circumstances will the money be included in a financial split. However, it is essential to notify the banks, and you may need to change the registered contact if you are concerned about the money being withdrawn and taken away from the child.