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This primer is designed for families in the UK.
Keen to give your kids a helping hand? Stash some cash in a savings account, and you’ll have money towards toys, school trips and all those extra activities over the years. Plus, parents can take advantage of some great interest rates when saving for their children when compared to standard savings accounts. This Primer looks at options for parents who want to stick to the safety of cash, rather than venturing into the stock market.
Low risk safe storage (around 5 years)
Creating a Quick Buffer (around 2 years)
Saving for your children in a separate account stops the money getting siphoned off into everyday expenses. You might also earn a dollop of extra interest, if you use a savings account that can only be opened for a child under 18.
Picking the right account isn’t just a matter of spotting the highest interest rate. There’s a bewildering range of options, so first you’ll need to think about what you want from a savings account:
You might earn more interest if you have a larger amount to pay in, or can commit to saving a regular amount each month, rather than just paying in random amounts here and there.
If you can leave savings untouched for a year or more, you’ll often earn extra interest.
Bear in mind your toddler might grow up into a tearaway teenager. Open an account in your child’s name, and they could withdraw the whole lot when they turn 18. If you’d rather make the decisions, stick savings in your own name.
Often, you’ll earn more interest with accounts operated over the internet, rather than based in a branch. Check out local building societies though - some offer tip top interest if you live locally. New challenger banks may also offer higher interest rates than familiar high street names to tempt customers in.
If you want to save a lot of money for your children, look out for tax-free accounts. It’s all down to how the interest might stack up. As adults, basic rate taxpayers can earn up to £1,000 a year in interest without paying a penny in tax. Even higher-rate taxpayers can earn up to £500 tax-free. But if a child earns more than £100 interest a year from money given by parents or step-parents, it gets taxed as if it was earned by the parent. So if it pushes you over your own Personal Savings Allowance, you’ll have to pay income tax on it. Luckily the £100 limit doesn’t apply to money generously given to your child by other relatives, godparents and friends, or if you stash it in a tax-free account like a Junior ISA (more info below).
Basically, the more restrictions involved in a children’s savings account, the more interest you should earn in exchange.
Here’s a RoosterMoney run down of the different types of accounts on offer, if you’re saving for your kids:
Savings account with the least red tape – and typically the least interest too. Bung money in and out whenever you want.
Make a note in your diary or add an alert on your phone just before the interest rate ends, so you can switch to a new account.
If you’re willing to save every month, you can find tempting rates on offer, up to the heights of 4.5%. However, you may not be able to pay in megabucks each month, and the high rates typically only last for a year, so be ready to move the money when the interest drops off a cliff. Check if you can take anything out during the year, should you need money in a hurry - some accounts let you make withdrawals, some don’t. Some accounts will also whip the interest away if you miss a monthly payment.
Lock away money for longer, and you should get more interest in return. Fixed-term bonds can run from one to five years, so pick whatever suits. Just remember you’ll be stuck on the same rate if interest rates elsewhere go up. Plus, if you have to take money out before the end, you’re likely to get charged a penalty and lose a big chunk of your interest.
Feeling lucky? Parents, grandparents and great-grandparents can buy Premium Bonds from National Savings & Investments (NS&I) in children’s names. Each Premium Bond brings the chance to win from £25 to a million pounds in the monthly prize draw. However, there is no guarantee of winning anything at all. In fact, the chance of a £1 bond winning is 24,500 to 1 and the prize fund works out at 1.4% a year. You can save from £100 up to £50,000 or set up a standing order from £50 a month.
The benefit of Junior ISAs is that the tax man can’t touch anything inside it. RoosterMoney has actually written a handy Primer all about Junior ISAs, but basically they come in two flavours: cash Junior ISAs, much like ordinary savings accounts, and stocks and shares Junior ISAs used for investing. You can open one or both types of Junior ISA and pay in up to the Junior ISA allowance each tax year, then add more in tax years afterwards. The limit for 2018/19 is £4,260. The catch is that you can’t take any money out until the child reaches 18, when the JISA magically transforms into an adult ISA. At that point your offspring can get their hands on the lot. Here’s hoping RoosterMoney has helped teach them great lessons about money beforehand.
If your kid was born between 1 September 2002 and 2 January 2011, you might still have a Child Trust Fund aka CTF. CTFs were replaced by Junior ISAs, so you can’t open a new one, but you can continue saving with an existing CTF, or ask a Junior ISA provider to transfer your CTF across. Just like Junior ISAs, you can get cash and stocks and shares versions, and you can’t take money out until the child reaches 18, when they get control of the contents.
“Every month, we add a small amount to Junior cash ISAs for each of our boys, and we add any money they get for birthday or Christmas. We opened accounts in their names so they can choose what they want to do with it when the time comes. In an ideal world, I’d love to help with a house deposit, but they might spend it on something totally different.”
Legally, the money belongs to your child, so they could blow the lot. Remember, you don’t have to open a special children’s savings account to save for your children. You could open any old account with a decent interest rate - and keep control of the contents.
Just because an account is labelled for children, doesn’t mean it will pay the best rate. Cast a quick eye over best buy tables for ordinary savings accounts too.
If you’re burdened with debt, aim to clear any expensive debts first, before you start saving for your children.
Cash may seem safe and secure, but over the long term, historically, stocks and shares have grown much more than cash. Trouble is, while you hope for higher growth, there are no guarantees and you could get back less than you started with. But if you’re putting away money for at least five years, and potentially for 18 years or longer, you could raise much more money for your children if you invest in the stock market instead.
“It is so simple to start saving for a child - all it takes is a small deposit each month. The main difference between cash Junior ISAs and other children’s savings accounts is that with JISAs, the money is locked in until the child turns 18 and they tend to offer much better rates than other children’s savings accounts.”
Weigh up which account suits the way you want to save, watch out for tax traps, and consider opening an account in your own name if it pays more interest or you don’t want to risk your children spending the lot when they turn 18. But if you can stash away savings for longer than five years, it’s worth thinking about investing as an alternative.