Many children will have received gifts of money at Christmas, from relatives who despair of keeping up with the latest pre-teens trends.
Rather than leaving the cash in the envelope, it makes sense to use it to for something that could go on working for them for the whole of their lives – the habit of saving.
Children’s savings accounts
Opening a savings account for your child is a great way to build the savings habit as well as grow a nest egg for his or her future, as they can see their cash growing with every deposit and interest payment. It encourages kids to save, teaches them a valuable habit that will stand them in good stead in later life, and could help solve the problem of what to give for Christmas and Birthdays for years to come.
You can set up an account with a bank or building society on behalf of children of any age. However, for the account to be in the child’s name they will need to be at least seven.
Children’s regular savings can provide better interest rates, although you may need to commit to making monthly contributions. They usually limit the number of withdrawals each year and may restrict the amount of money you can save each month, making them rather less exciting for children to use.
Junior ISAs are another way to save for your children. Parents and other relatives can save up to £4,260 in the 2018-19 tax year in a Junior ISA – which will increase to £4,368 in 2019-20.
However, although like other ISAs, the JISA is tax efficient, the money can only be accessed when the child turns 18. This makes JISA saving ideal for building up a tax free lump sum for college or the deposit on a first home.
What about investing?
Of course, although saving remains worthwhile, current low interest rates mean it is less rewarding than it once was. If the intention is to give a child a good financial start in life rather than build the savings habit, you might want to look at the potential of higher returns from investing.
Like standard ISAs, Junior ISAs can be held in stocks and shares as well as cash.
You can also set up investments on behalf of your child in a bare trust or a designated account. A bare trust will be treated as your child’s for tax purposes. A designated account will be earmarked for your child but will be in your name and treated as your investment, and any income of more than £100 per annum will be taxed at your rate.
Investing might be best reserved for slightly older children. Discovering that investments fall as well as rise might be too harsh a lesson for their early years.
A pension for your child?
If you’re thinking of taking a very long-term approach, the best investment of all could be a pension for your child.
You can currently contribute up to £2,880 each tax year, which is boosted to £3,600 by tax relief. When your child reaches 18, the pension will transfer to them. They can start making their own contributions – but simply letting the sum saved grow with compound interest for the next 40 years might be enough to provide them with a comfortable retirement, with the pension being accessible from 55 onwards.
Helping your child develop the savings habit, and to discover investment are both key steps in their financial education. You could combine them with another – the importance of getting expert advice. To get expert answers to their – and your own – financial questions, simply call us at Continuum.
Equity investments do not afford the same capital security as deposit accounts.
The Financial Conduct Authority does not regulate deposit accounts, taxation advice and school fee planning.
The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to suitable investment strategy, you should seek independent financial advice before embarking on any course of action.
The value of investments can fall as well as rise and you may get back less than you invested.
moneyadviceservice.org – childrens savings options
moneysupermarket.com – childrens savings accounts
thisismoney.com – saving for children – 1st April 2011