23rd October 2015 at 9:04am
It’s Family Friendly Week from 19-24 October – what better time to look at the ins and outs of saving for children.
There’s always plenty to pay for when it comes to children. One minute you’re cooing over the patter of tiny feet; the next thing you know, you are paying for nursery fees, quickly followed by schooling, childcare, holidays and clubs. In the blink of an eye, that cute ‘baby’ is hurtling towards university or college and needing to find tens of thousands of pounds to study for a qualification that will, hopefully, set them up for life.
If everyone thought about children – or grandchildren – in such a black and white way, few of us would ever get round to saving. But, according to the Money Advice Service, UK parents are, on average, saving £42.45 a month for their children.
Choosing how to save for a child’s future involves making choices. You need to have some money that is easy-to-access as well as, ideally, savings that can build over a number of years to fund those big life events. Yes, it’s back to those university fees again, but could just as easily be a gap year or a welcome deposit for a first home.
Breaking down what you want to save for into manageable chunks, start early and it all adds up.
What are the options for children’s savings?
Bank and building society accounts are ideal for small amounts of cash and for ad hoc birthday and Christmas money from the family. On the downside, interest rates can be low. They’re also easy to dip into which isn’t always a good thing.
Interest earned is usually tax free, although banks and building societies automatically deduct tax from interest earned at the basic rate of 20%. You can ask them not to do this by filling out a form. The Gov.uk website has more detail – and how to claim a tax refund.
However, if interest earned is more than £100 in any tax year, it’s taxed at the parent’s income tax rate.
Saving for the longer term
The Junior ISA (JISA) is a tax-efficient way of saving for children under the age of 18. You can save up to £4,080 a year into cash or investments in a JISA in the 2015-16 tax year, with any investment income and interest free of tax.
Whether you choose stocks and shares or cash in a JISA can depend on the age of your child and how long you want to save for. If they’re very young, stocks and shares can give more potential for growth and help manage any stock market ups and downs.
If you are saving into a JISA for just a few years, cash might be a better option but any gains are likely to be modest and inflation can eat into the value of those savings.
If you’re a grandparent, you can’t open one for a child but you can make contributions up to the annual limit.
It’s worth knowing that parents can now transfer an old-style Child Trust Fund, if they have one, into a JISA. But do bear in mind that a JISA does lock savings away and those savings belong to your child who can access their money at 18 and spend it how they want to.
Children’s bonds are another option. They’re fixed term – for example five years – with a guaranteed interest rate and any gains are tax free. Interest rates do tend to be on the low side and the money may not grow fast enough to keep up with rising costs or inflation.
Whatever you decide, taking steps to save for your child’s future could help set them up for life.
This blog is not financial advice. A pension and a stocks and shares ISA are investments. Their value can go up and down and may be worth less than you paid in. Laws and tax rules may change in the future. This information is based on our understanding at October 2015.