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Saving for a child is a great way to get them ahead in their future. Not only can they begin their adult lives with money already behind them, but it can also be beneficial in teaching children the value of money. It’s never too late to start saving for a child, and you may have heard of the phrase, “The best time to start was yesterday. The next best time is now.”
How to start saving for your child’s future
Once you have made the first step in deciding you want to start saving for your child’s future, it can be tricky figuring out where to begin. There are a few different options as to where to you can invest your money, depending on how much you are willing to save every month, what your savings goal is and at what age you would like your child to access their savings.
Working out how much you would like to put away every month is a great start, and it’s important to only save what you can afford. The sooner you start saving, the sooner your interest will start to earn interest – which is known as compound interest. The longer your child’s savings are stored away, the longer you will have for your interest to build up over time.
Think about what you would like your child to use their savings for. Maybe they could buy their first car, or put the money towards their first home, or even use the money towards university if that’s what they would desire. Don’t get too tied up in these thoughts however, as ultimately it doesn’t matter too much what they put their money towards, it is more so the fact that they have this head start in life that is important.
What is the best account for a child?
Children’s saving account
You can open a children’s saving account with most banks and building societies, and they can only be opened by, or on behalf of a child under 18 years old. This can be a good place to start as they pay a slightly better interest rate than most adult savings accounts. Your child can start managing their own account when they turn 7, and most banks will give the child a debit card to access their money when they turn 11. You may not want the child to access this money too early, however in this instance it is important to note that if the account is in the child’s name, it is their money. When Saving For Children with a children’s savings account, you can open an account with as little as £1, which will certainly get the ball rolling.
There are two main types of child saving’s accounts, instant access and regular savings.
Another option is to save into a Junior ISA. They are for children under 18 and when the child reaches 18 the account will automatically be turned into an adult ISA where the child can manage the account themselves. Junior Cash ISAs can be a good savings option as your child won’t pay any tax on the interest that they earn, which can be a great selling point for most people looking to save for their children.
Each child can only have one Junior Cash ISA and one Junior Stocks and Shares ISA during their childhood, however it is possible to transfer both of them to different providers. Junior Cash ISAs are similar to savings accounts, although the interest is tax free and the money is locked up until the child turns 18. So if the idea of your child accessing their money before they turn 18 is an issue for you, this could be a better option.
Junior Stocks and Shares ISAs allow you to buy shares, bonds and other eligible investments on behalf of a child, and the value of the Wealth and Savings can fluctuate as with all investments. The Junior Isa limit for the 2021-22 tax year is £9,000, so if you can afford and would like to put away more than this amount each tax year it might be a good idea to look at other options too.
What are the tax implications of saving for a child?
You usually don’t have to pay any tax on children’s accounts, although special rules do apply for money given by parents or legal guardians. So if you give your child money that earns more than £100 in interest in a tax year, you may have to pay tax on all the interest that their savings have learnt depending on your personal circumstances including any tax allowances you may be entitled to. However, money given by grandparents, relatives or friends other than the parents and legal guardians don’t count towards this £100 limit.
How can you open an account?
With most accounts, there are three ways to do this:
- In a branch
- By post
In some cases you may be asked to visit your nearest branch to provide proof of identification before an account is open. Identification may be needed for both yourself and your child.