It’s important to teach your children good financial habits like saving money and investing. Parents can also save for their children’s futures by opening children’s savings accounts. There are a few options for that here in the UK and in this blog post we’re going to go through the different options and the pros and cons of them.
Child Trust Funds
Child trust funds are no longer available, but we are discussing them on this blog post because in 2024 and in the next few years, these accounts will have matured. Children born between 1 September 2002 and 2 January 2011 were eligible for one. The Junior ISA has since replaced the child trust fund. Like a Junior ISA, a parent could add up to £9,000 a year tax free into an existing child trust fund account. The money belongs to the child, they can take control of the account at 16, but they cannot withdraw any money until they are 18, unless the child is terminally ill or passes away.
Once the child trust fund is matured, the child automatically takes over the account and no more money can be added, but they can withdraw the money or transfer it to an adult ISA, where the money can continue to grow.
Junior ISA
An ISA is a common way people in the UK to build wealth. Did you know that you can open a Junior ISA for your child? You can either open a cash junior ISA or a stocks and shares junior ISA. A cash ISA is like a savings account with regular interest. A stocks and shares ISA is a bit riskier because the value of investments can rise or fall. If the stock market does well, your money grows more in a stocks and shares ISA than in a cash ISA and even with inflation, you’ll build wealth. However, if the stock market is doing poorly, then you could lose money. You can open both a cash ISA and a stocks and shares ISA for your child. When investing, it’s wise to not put all of your eggs in one basket.
One thing to bear in mind is that there is a tax free contribution limit of £9,000 per tax year. Your child cannot get access to the money until they are 18. At that point, their junior ISA is converted into a regular ISA.
Junior SIPP
It’s good to teach your children the importance of saving for retirement at a young age. There will come a point where you won’t be able to work anymore or you might not want to work anymore and it’s important to have money saved for that point in your life. A Junior self-invested personal pension account can be opened for anyone under 18. The annual limit for deposits is £2,880 per year, and this money becomes £3,600 thanks to tax relief. An extra £720 in your pocket! This type of account is also useful for giving grandchildren a lifetime gift to lower the value of your estate so you pay less in tax.
Children’s Savings Accounts
You also have the option of opening a children’s savings account for your child. The minimum opening deposit is just £1. Besides a Junior ISA, you can pick from a variety of different children’s savings accounts like an easy access account, regular savings account, or a notice account.
Choosing the right children’s savings account depends on how long you intend to save the money. An easy access account allows you to withdraw the money whenever you’d like, but these typically come with a lower interest rate than a notice account or regular savings account. A notice account often comes with a higher interest rate, but you cannot simply withdraw the money as you wish. With a notice account you need to give notice of at least 32-95 days before withdrawing money. However, this can suit families who plan to save long term. A regular savings account is best for people who plan to regularly deposit money in the account monthly.
NS&I Premium Bonds
Premium bonds are lottery bonds offered by the government’s National Savings & Investment agency. While a premium bond doesn’t earn interest like a savings account, if you have a premium bond you are entered into a monthly prize draw where you can win tax free cash prizes from £25 to £1 million. The interest on these bonds is distributed into a prize pool instead of paying dividends. You must have had your premium bonds for at least one calendar month in order to be eligible to win a prize. You can also reinvest your prize money into more premium bonds. These can be great gifts for children and they teach good financial habits. The government will buy back premium bonds for their original price. Each person may own up to £50,000 in premium bonds.
Benefits of investing
Junior ISAs and Child Trust Funds are a tax efficient way to invest money for the future and the generous limit allows you to be flexible with contributions. Each person has their own ISA allowance so you can save and invest more for the future. There are a lot of expenses that come up in adulthood like university tuition costs and associated living expenses, buying a car, buying a house, planning a wedding, starting a business, save for retirement, or life experiences like travelling abroad. By saving and investing early, while you can, you can take advantage of compound interest and your child has even more money for the future.
Helping your child save for the future is important, but it can be overwhelming looking at all of the options on the market. An independent financial adviser can help. To book your free discovery meeting with Neil, click here.