How to save and invest for your children
Make the right decisions now to help your kids in the future
If you’re a child of the 1980s you may remember carefully saving your pennies to get your hands on a certain colourful piggy bank family. Although today’s options for kids’ savings might not have the kitsch appeal of porcine porcelain, they do offer far more sophisticated ways to set your children on the path to a better financial future.
It’s estimated that almost half of parents regularly put some money aside for their children, and, even if you can’t save, it’s likely that your family will give your children money from time to time.
This guide will explain the different options if you want to save or invest for your children and how they work.
Children’s savings account
The piggies may now be long gone but many banks and building societies still offer tempting freebies with children’s saving accounts. However, it’s much more important to examine the interest rates, which vary widely, so don’t just open an account with your own bank without checking what others are offering. These accounts aren’t tax free, but your child shouldn’t have to pay tax on the interest.
Junior cash ISA
A Junior cash ISA works in a similar way to an adult cash ISA, but there are some key differences. You can only pay up to £4,368 into one in the current 2019/20 tax year (compared to £20,000 for an adult ISA) and you don’t take out a new Junior ISA every year, you just keep adding to the existing one. Also, money in a Junior ISA is locked away until your child’s 18th birthday.
If you open a junior cash ISA for your child, the interest they get paid will always be tax free, no matter how much they earn or what other savings they have. As with adult ISAs, you can transfer a junior cash ISA from one bank or building society to another to get a better interest rate.
Junior stocks and shares ISA
When people think of their child’s future, the stock market isn’t usually the first thing to come to mind. But if you’re prepared to take on board a bit of risk, investing the money rather than having it sit in a savings account might be worthwhile.
The stocks and shares version of the Junior ISA shares some features with its cash equivalent; you can pay up to £4,368 into one in the current 2019/20 tax year, the money is locked away until your child is 18 and the gains made, in this case through fund growth and dividends received, don’t attract any tax liability. Please note however that you can only open one of each type of Junior ISA (one cash ISA and one stocks and shares ISA) and the ISA allowance of £4,368 is split between them. So if you want to deposit £2,184 into the Junior cash ISA and £2,184 in the Junior stocks & shares ISA you can do this – providing you don't go over the £4,368 limit.
Junior stocks and shares ISAs will invest your money in funds that spread your money across different types of investments, including shares. Exactly which types of investment or companies varies from fund to fund. If you can leave the money alone for a long time (at least ten years), you should do better than if you keep the money in a regular savings account. However, this isn’t guaranteed.
While nobody doubts that planning for the future is a sensible idea, surely getting your child a pension plan is getting ahead of yourself? Not at all. Firstly, the earlier they start saving for their retirement, the less they’ll have to put aside each month. Secondly, money that’s paid into a pension is topped up by the government. So you and other relatives can pay up to £2,880 a year into a pension between you. If you pay in the maximum, once the government’s tax top-up is added, your child will have £3,600 paid into their pension.
Should you save or invest for your children’s future?
There’s no right or wrong answer when it comes to saving or investing; it really depends on your own circumstances. You may want to open a savings account for money that your child can spend as they’re growing up and an investment plan for money that’s locked away. It doesn’t have to be one or the other. But whatever you do, it must be right for you and your child.
Before making financial decisions always do research, or talk to a financial adviser. Views are those of our mentors and customers and do not constitute financial advice.