There are many motivations to save for your children’s future. You may have a specific goal in mind, such as education or a deposit on their first home. Or you may just want to put money aside so it’s there when they need it.
Whatever you’re saving for, there are a wide range of ways you can save. So, this blog aims to let you know about the options you could consider to set your children on the path to financial security.
What are the advantages of saving money for children?
We’ll discuss how to save for your children in the next section. But before we do that, it’s important to consider what the advantages are of saving for them.
- Developing financial responsibility – saving can help children learn the value of money. Weighing up the value of saving versus spending will help lay the foundation for responsible financial habits throughout their lives.
- Financial literacy – children will gain practical experience in setting goals and budgeting. They’ll also be able to see if and when they reach their goals. By doing so, they’ll improve their money management skills for adult life.
- Independence – having their own savings gives children a sense of independence. It can also boost their confidence and attitude towards managing their own finances.
- Preparing for the future – savings provide a financial safety net for unexpected expenses, or for larger purchases. This may be for a new smartphone, their first car, or a holiday with friends.
How to start saving for your child’s future
The good news is there are lots of ways to save for your child’s future. This means that no matter how much or how often you want to save, you’ll be able to find something that works for you.
This may involve opening an account in your child’s name, in which case your child owns the money. Alternatively, you may decide to use a savings account in your name and give your child the funds at a later date.
Here are some of the options you could consider, either on their own, or in combination with each another:
- Instant access savings accounts – are very flexible and operate much like current accounts. You can invest and withdraw on behalf of your child flexibly, but as a result the interest rates won’t be as high as accounts with restricted access.
- Regular savings accounts – generally involve paying in a certain amount each month. This could be a set amount, or you could amend it throughout the year. The minimum and maximum amount you and your child can pay in will vary by provider, but they tend to have higher interest rates than instant access accounts. Some accounts will also have rules around when money can be withdrawn.
- Fixed rate savings accounts – are also known as bonds and pay a fixed interest rate for a set period. Interest rates tend to be higher than with accounts where you can access the money. Most fixed rate savings accounts will not allow you to access your funds until the end of the term.
- Bare Trust savings accounts – allow you to make an irreversible gift to a trust, which holds the funds until the beneficiary turns 18. The trust is managed by trustees and allows parents, grandparents and legal guardians to provide their child or grandchild with financial support as they enter adulthood.
- Junior ISA (JISA) – are like other savings accounts in many ways, allowing you to invest money over the tax year. You can invest a maximum of £9,000 in a JISA each tax year. Your child won’t be able to access their money until they turn 18, although they can transfer between providers. Their main benefit is that any interest your child earns is tax free. However, you may find you can get a better interest rate by using some of the other options we’ve already looked at, which may compensate for any tax benefit.
- NS&I Premium Bonds – work in the same way as they do for adults. You purchase bonds and, while you won’t earn any interest, your child will be in with a chance of winning a tax free prize each month. You’re also free to buy and sell them whenever you like, with a maximum value of £50,000 per child.
- Piggy bank – an old fashioned piggy bank won’t earn your child any interest. But it’s completely flexible and will help them become more familiar with money. Combine it with regular pocket money and they’ll start to see the benefits of saving up for something they want.
Starting to save early has an added bonus as your child will benefit from compound interest. This is where you initially earn interest on your savings, but over time you’ll earn interest on the interest as well. This can help maximise your savings growth.
Can a grandparent open a savings account for a grandchild?
It’s common for grandparents to want to put money aside for their grandchildren. And while it’s possible, there are limits on what kind of account they can and can’t open:
- Many banks and building societies offer children’s savings accounts that grandparents can open in their grandchild’s name.
- Grandparents can buy Premium Bonds for grandchildren under 16.
- While they can’t open a Junior ISA, they can contribute to it once it’s set up.
- Grandparents can also contribute to a children’s pension (Junior SIPP) but can’t open one directly.
Finally, grandparents can use their annual tax free gift allowance of up to £3,000 per tax year to give money to their grandchildren. We’ll discuss this in more detail in the next section though.
Can parents gift money tax free?
In short yes, but there are restrictions on what you can do. These relate to annual allowances and exemptions, and some gifts may be subject to Inheritance Tax (IHT). The main options are:
- Annual gift allowance – everyone is allowed to gift up to £3,000 tax free, per tax year. This limit applies to the giver though, not the receiver. So, a parent could give their child £3,000. If they have more than one child though, they can’t give them £3,000 each. They would only be allowed to give them £3,000 in total. Both parents could use their allowance for the same child though, meaning they could gift £6,000 in total. Also, this allowance can be carried forward once to the next tax year. This means that if you didn’t gift any money in the previous tax year, you could gift £6,000 in the current year.
- Small gifts and gifts for special occasions – it’s possible to give gifts of up to £250 per person, per tax year, providing the receiver hasn’t been given part of your annual £3,000 gift allowance.
- Wedding or civil partnership gifts – allow parents to gift up to £5,000 tax free to each child for their wedding or civil partnership. Grandparents are also allowed to gift £2,500, while other people can gift up to £1,000. These gifts do not count towards your standard £3,000 annual allowance.
- Regular payments – parents can make regular gifts to their children. These could cover their rent or other living costs, or be paid into a savings account. To qualify, they must be given consistently and be made from your monthly income after you’ve paid your living costs though.
- Larger gifts – if you give away more than the above allow, you may have to pay Inheritance Tax (IHT). There’s no upper limit on how much can be gifted. And if a parent lives for more than seven years after making a large gift, no IHT is due. However, if a parent dies within seven years, the gift becomes part of the estate for IHT purposes and may be taxed. The rate you pay will be between 40% and 0%, depending on how soon the parent dies after giving the gift, as a taper rate of tax applies.
It’s also worth noting that gifts to children aren’t counted as income by HMRC, so they won’t have to pay income tax on them. However, if they go on to earn money from the gifted funds, say by investing them, they’ll have to pay the relevant taxes.
As you can see, it’s possible to save for your children in a number of ways. However, it’s worth consulting a financial advisor if you’re unsure about how best to utilise the options available to meet your family’s needs.
