Children's Savings Guide
Making good financial decisions now can lead to a wonderful gift for their future
Great expectations
What kind of expectations does your child have? Our research has shown that teens expect to move out at 22, get their dream job at 25 and buy a home at 28.
Savings can help them pay for the important stuff – going to university, buying their first home, or even funding a gap year – but getting kids involved in saving is also a good way to teach them about money.
Children’s savings accounts
Children’s savings accounts are savings accounts designed specifically for children. Broadly speaking there are two main types:
- Easy-access savings accounts
- Regular savings accounts
Easy-access savings accounts
If you want to involve your child in the saving and spending process then an easy-access savings account could be a good choice. It means kids can add and withdraw money from the account whenever they like.
Interest rates tend to be variable and lower than that of regular savings and fixed-rate accounts, but ideal for your child to engage with their account.
Junior ISAs
Junior ISAs were introduced in 2011 to replace the government-subsidised Child Trust Fund (CTF) scheme. Unlike CTFs, Junior ISAs do not include an initial government payment, but are a long-term, tax-free savings accounts for children.
There are two types of Junior ISA - ones that save in cash and ones that invest in stocks and shares. A child can have both a cash and stocks and shares Junior ISA, and up to £9,000 can be contributed towards them - combined - each year.
A child can have one of each type of Junior ISA at any one time. Accounts can be transferred between providers if needed.
When the child is 16 they have the option to take control of the account, make their own investment decisions and transfer between providers, but money cannot be withdrawn until they are 18. At this point it is entirely up to them – in legal terms – how to use the money.
At age 18 the Junior ISA becomes an adult ISA and retains its tax-free status. Because of their typically long-term nature, Junior ISAs are generally better suited to goals such as helping your children pay university tuition fees, or to use as part of a deposit on a first home.
Junior ISA
With our stocks and shares Junior ISA you can start investing from just £10 per month up to a maximum of £9,000 each year on behalf of a child. Anyone can pay in, and the child will gain access to the account once they are 18 years old.
How much could you help your child save?
Decide how much you want to open your Junior ISA with and and how much you’d like to pay each month. Our simple Junior ISA calculator will quickly give an idea of how your child’s money could grow.
The projection shows how your child's Junior ISA could grow with low, medium and high growth scenarios. Remember, projections are not a guarantee of future performance and your child could get back less than you pay in.
Tax Exempt Savings Plans
Tax Exempt Savings Plans (TESPs) are investment products that are only offered by friendly societies like us.
They are different from savings accounts and ISAs in that you choose how long you want to invest for - usually ten years or more - and the payments are fixed for this period.
You can save up to £25 a month or £270 a year into a TESP and when the policy matures you receive a tax-free lump sum, as long as you have kept up these payments.
Junior Bond
Our Junior Bond is a Tax-Exempt Savings Plan designed to help you save on behalf of a child for 10 to 25 years. You can open one for any child under the age of 16 and when the policy matures the child will receive a tax-free lump sum.
What's the difference?
Junior ISA
Junior Bond
Other Options
Your own ISA
Saving for your children in your own cash or stocks and shares ISA could be an attractive alternative to a Junior ISA. With the current annual ISA limit standing at £20,000, it is certainly possible to save or invest more – but this will mean limiting the amount you can save for your own purposes.
While the tax benefits are the same as for Junior ISAs, money can be withdrawn from a standard ISA at any time – which could be a good or a bad thing, depending on your point of view. If you are saving for your children’s school fees, for example, you may need to have access at a much earlier age than 18.
And there is no point at which the contents of the ISA become the legal property of your child, which could be a selling point if you have concerns about whether the money will be used wisely.
Advantages:
- Tax-free saving.
- Early access is possible.
- Control remains with the parent.
- Choice of cash or investments.
Disadvantages:
- Saving for your child will reduce the amount you can save for other purposes.
- The money isn't locked in for the child, so the savings could end up being dipped into.
A child’s pension
If you want to take a really long-term approach, you could consider setting up a pension for your child – perhaps alongside one of the savings vehicles described above.
Up to £3,600 a year can be saved on a child’s behalf in a self-invested personal pension (SIPP). But because tax relief can be claimed on pension contributions, this amount of pension will only cost £2,880 – or £240 a month.
In general, children’s pensions are designed to be invested in the stock market and related assets. Like any other pension, the money can not be accessed – without incurring significant tax penalties – before the age of 55. But the potential returns than could be achieved over a period of half a century or more are considerable – although they are not guaranteed.
Advantages:
- Tax relief is paid on contributions.
- The fund has a long timeframe in which, potentially, to grow.
- Your child will probably thank you – eventually.
Disadvantages:
- The money can’t be accessed until age 55, which means it probably can’t be used for university fees or a first property purchase.
- The tax treatment of pensions may change in a negative way in future.
More to know
Cash versus investments: The importance of your timeframe
One of the key decisions relating to saving for children is whether to hold the money in cash – in some form of bank deposit account or Cash ISA – or in stock market linked assets such as shares or investment funds.
Since the financial crisis of 2008, interest rates in the UK, as well as many other countries, have been particularly low. Returns on savings accounts have generally only been a fraction higher than inflation – if at all.
But while cash in deposit accounts may not be earning much interest at the moment, it is guaranteed not to lose value. When you put money in shares or investment funds, on the other hand, your potential returns are greater – but at the same time there is no guarantee that you won’t lose some or even all of your money.
The received wisdom is that stock market linked investments are more suitable for longer-term saving – with a typical timeframe of at least five years. This gives investors a better chance of riding out any early losses or volatility in their investments.
If, on the other hand, you might need to access your funds within a year or two, cash is likely to be more suitable as your capital is effectively guaranteed even if your returns are not (the first £85,000 held on deposit per person per banking group in the UK is protected by the government-backed Financial Services Compensation Scheme, which kicks in if the institution in question gets into difficulties).
There are steps you can take to reduce the risk your investments face: buying a wide range of shares, for example through an investment fund, increases the diversity in your portfolio. This diversity can reduce the risk of sudden sharp falls in value because the various shares are unlikely all to fall in value at the same time. You can also opt to invest in businesses that are considered less risky – such as larger, longer established firms rather than start-ups.
However, if you are putting money aside for the best part of two decades, as will often be the case with a Junior ISA, it is well worth considering holding at least some of the money in the stock market given the potentially higher long-term returns that are available.
Do children pay tax?
Most people don’t realise that children have the same personal tax allowance as adults under the age of 65 - £12,570 per year. The difference is that most adults use up their tax allowance with the first £12,570 of their income.
For children this is obviously rarely the case. So as long as their 'annual income' is less than this threshold then they wouldn't pay tax. For example: £200,000 in a savings account earning 5% each year interest provides £10,000 income, which is below the child's tax threshold.
Tax on money given to children by their parents or relatives
A different rule applies however if a parent or step parent puts money into a child's savings account. In this case, the child can only earn up to £100 interest in a year on that money before they get taxed on it. This rule takes precedence over the one just mentioned as it specifically targets money given to children by their parents regardless of the child’s overall income. Interest over £100 generated by a child's savings that comes from money given to them by each parent will be taxed at the parents' tax rate.
To follow the example above, £2,000 given to a child by a parent earning 5% each year interest in a savings account generates the cut off amount of income (£100) allowed before tax would have to be paid at the parents' tax rate. The good news is that this rule only applies to parents and step parents, not friends and other family members. So if the child's grandparents, uncles, aunties, gave them money and it was earning interest the £100 limit would not apply.
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