Saving for children
A child’s savings account is a way of putting money aside for their future. Here are some ideas for different ways to save that can help you give them the head start in life that every parent longs for.
How to save for your children's future
The best time to start saving for your family? Probably at least 5 years ago. The second best time? Right now.
The sooner you start saving, the sooner you start earning interest on your interest. This is known as compound interest – something which effectively turns time into money.
With compound interest, it’s all about how much time is on your side. And when it comes to saving, time is the huge advantage children have over adults. And the longer your children’s savings are in place, the bigger they will get.
We’re not talking about saving half your income each month. Just putting aside as much as you can and making regular contributions can make a big difference. Small amounts soon add up.
Here’s an example for you:
If you made an initial deposit of £1,000 and added £100 a month, after 21 years your net contributions would be £26,200.
When you add in a return of 2.0% (the rate for many junior ISAs as at December 2020), compounded monthly, this means you’d earn £6,607.20 in interest, taking your total savings to £32,807.20.
Picture your family goals
To help motivate you, it pays to think of the big milestones.
Wouldn’t it be cool to get them on the road when they’re 18 with driving lessons and a first car? Or perhaps your dream is to help them get the key to their first door?
Naturally, the path they take may be very different from the one you’ve imagined for them. So in the end, it doesn’t matter what you’re saving for. What counts is that by putting some money aside on a regular basis, you’re giving them more options.
Even - especially - if they’re still in nappies, now is still the best time to start saving for the big milestones as it gives your money longer to grow. And as we’ve seen, the more interest you earn, the less of your hard-earned money it’ll take to meet those goals.
What's the best account for your child?
A good place to start could be a children's savings account. These accounts, which can only be opened by, or on behalf of, a child under the age of 18, usually pay a slightly better interest rate compared to adult savings accounts.
You might want to open one children’s account for your child to put their pocket money into, and another for you to pay in any larger amounts.
It's worth remembering that if the account is in your child's name, it's your child's money. Many accounts will allow the adult to stay in control of the money until the child turns 16. However, when they do (or when they turn 18 in the case of a child trust fund or a junior ISA), the money is technically theirs to do with whatever they want.
Understand the tax implications
There’s usually no tax to pay on children’s accounts. However, special rules apply for money given by parents. 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 depending on your personal circumstances including any tax allowances you may have available. Gifts from grandparents, aunts, uncles and friends don’t count towards this £100 limit.
An alternative would be to open a junior cash ISA, where you can save up to £9,000 for each child in the 2021-22 tax year. When they turn 18, the account will convert into a full cash ISA so they’ll never have to pay income tax on it – ideal if the plan is for your child to have high levels of savings by their 18th birthday.
The important thing to remember is your children have tax allowances too so it makes sense to use them to best effect. You’ll be better off – and therefore your children will be too.
As with all things tax-related, bear in mind that the value of the benefits to you will depend on your circumstances, and that tax rules could change in the future. To find out more about tax on children’s savings, visit GOV.UK
How does inflation affect savings?
When considering your long-term savings options, there’s a hidden risk you need to be aware of – inflation. Inflation is when money loses value as things become more expensive over time.
As the months and years roll by, inflation will reduce the total value of your children’s cash savings because you’ll be able to buy less with the money.
Going back to the compound interest example, we showed how over 21 years you would have earned £6,607.20. Yet when you factor in inflation over that period which as of October 2020 is at 0.9%, those earnings would only be worth £3,393.46 in today’s money.
As you’ve got time on your side, investing could be a way to potentially beat inflation. Of course, the key thing you need to remember with investing is there are no guarantees and you may not get back what you put in. Find out more on our new to investing page. And to see how much you might need to invest to cover the cost of your children's education, try our children's education calculator.
