Saving for your child’s future as early as possible is a fantastic way to help them build a nest egg.
Despite the boost this can give a child, many parents in the UK are seemingly struggling to save. In fact, according to research from MoneyAge, 20% of parents in the UK have either reduced or halted savings towards their child’s future in the last 12 months.
While it may seem prudent to focus on your own financial needs rather than saving for your children, putting some money away for the future can be a useful way to help them build a nest egg. It can even help them develop healthy saving habits.
So, continue reading to discover five clever ways to save for your child or grandchild’s future.
1. Children’s savings account
Your first option is a tried and tested savings account. These are traditional savings accounts with a bank or building society and are fantastic for helping your children develop healthy savings habits as they grow up.
You can typically open a children’s savings account for any child under 18 with as little as £1. When your child reaches the age of seven, they can typically start to manage the account – this could be the perfect time to start encouraging your child to earn their pocket money and save it in their account.
There are generally two types of children’s savings accounts:
- Easy access saving account – allows you to withdraw and deposit money at any time, though they typically have less competitive interest rates.
- Regular savings account – you usually need to save a certain amount each month or quarter, and the money may not be accessed easily. Though, they generally have higher interest rates than their easy-access counterparts.
2. Cash JISA
A Cash Junior ISA (JISA) is similar to an adult Cash ISA. Much like the adult version, a Cash JISA allows your child to save tax-efficiently – there is no Income Tax to pay on any interest they earn on their savings.
One important thing to note with Cash JISAs is that the money is typically locked away and can’t be accessed until your child reaches the age of 18. The child can start to manage the account from the age of 16.
Also, while the adult ISA allowance is £20,000 as of the 2023/24 tax year, the JISA limit is lower, at £9,000.
As the money held in a Cash JISA is locked away until the child reaches the age of 18, it may be worth sitting down with your child and discussing what they’d like to do with their ISA balance when they reach the required age.
After all, you don’t want your child to reach the age of 18 and immediately withdraw the money to spend irresponsibly. Instead, it may be wise to discuss the different options that are worth considering, such as using the funds for their further education.
3. Stocks and Shares JISA
As you may be able to tell from the name, a Stocks and Shares JISA allows you to invest on behalf of your child. And, better yet, you typically won’t pay any Income Tax or Capital Gains Tax (CGT) on returns made within the JISA.
As is the case with the Cash JISA, you are limited to the amount of money you can deposit to a Stocks and Shares JISA. As of the 2023/24 tax year, the JISA allowance is £9,000.
This covers all of a child’s JISAs, too. If you deposit £5,000 into your child’s Cash JISA, you will typically only be able to deposit a further £4,000 into their Stocks and Shares JISA within the same tax year.
Of course, one of the important considerations with Stocks and Shares JISAs is that, while they do offer the potential for growth on investments, returns aren’t guaranteed. The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
4. Premium Bonds
For those looking for a saving method that’s a little different, Premium Bonds could be worth considering. National Savings and Investments (NS&I) Premium Bonds can be bought in a child or grandchild’s name, and allow you to save into a government security that enters you into a random lottery with the chance to win varying amounts of money.
Anyone over 16 can buy Premium Bonds for a child but you will need to nominate someone to look after the child’s Bonds until they turn 16. This will need to be a parent or guardian.
A single bond only costs £1 – although the minimum investment is £25 – and the more you buy, the higher your chance of winning. As for the prizes themselves, the lowest prize starts at £25, and prizes increase in increments until they reach £1 million.
It’s worth remembering that only two Premium Bond holders win the big prize every month. Also, Premium Bond winners are chosen at random, and there’s absolutely no guarantee that you’ll earn any return.
In fact, the odds of winning the lowest prize of £25 for every £1 bond is roughly 1 in 24,500. Despite these high odds, NS&I states that the average prize fund interest rate is around 3.3%.
Potentially one of the most significant benefits of Premium Bonds is that, should you win one of the prizes, your returns are paid tax-free.
While you technically can’t lose money with Premium Bonds – they are backed by the Treasury – the real-term purchasing power of your savings can decline due to inflation if you don’t win any prizes.
Finally, while pensions are a long-term saving method, starting savings earlier can give the funds decades to grow.
You can set up a pension scheme for someone under the age of 18 – although bear in mind the child won’t be able to access these funds until at least age 55 (rising to age 57 in 2028).
It’s worth noting that since children usually have no earnings, their annual contributions are limited to £2,880 net as of the 2023/24 tax year.
One of the most valuable benefits that comes with encouraging your child to save in a pension pot is the tax relief they can earn. Typically, your child can make use of tax relief of 20% on their contributions, effectively pushing the annual contribution to a potential £3,600.
Better yet, any investments made within a child’s pension are shielded from Income Tax and CGT.
Above all, it’s important to remember that your child won’t be able to access the money until they reach retirement age. So, if they are likely to need the funds for further education or to buy their first home, a pension is unlikely to be suitable.
Get in touch
If you’d like to discuss ways to save for your children and help them become financially prepared for the future, then we can help.
Email firstname.lastname@example.org or call 01204 300010 to find out more.
A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
The Financial Conduct Authority does not regulate tax planning.