Best ways to save for childrenChildren's savings tips from Which? experts
02 August 2013
Whether you want to build up a nest egg specifically to help fund your child's university education, get them onto the property ladder, or generally to give them a brighter financial future, we've rounded up some of the best children's savings options.
1. Open a Junior Isa
Parents and other relatives can save up to £3,720 a year tax-free in a Junior Isa (Jisa) and the money can only be accessed when the child turns 18. Like adult Isas, Jisas can be held in cash or stocks and shares, or you can divide the allowance between both. Children who already hold a child trust fund are not currently eligible to open a Jisa.
2. Save with an NS&I Children's Bond
You can invest between £25 and £3,000 tax-free for five years at a time until the child reaches 16, at which point he or she will gain control of the bond. The interest rate is guaranteed so you'll know how much the investment will earn at the end of the five-year term. But if you need access to the money before the end of the five years, you'll face a penalty - the equivalent of 90 days’ interest on the amount you cash in.
3. Buy Premium Bonds
Parents and grandparents can open Premium Bonds for under 16s which may be held in the child’s name. Instead of paying interest, each bond number is entered into a monthly prize draw with the chance to win a between £25 and £1 million tax-free. On the plus side, all winnings are tax-free, but of course there's no guarantee that you'll win anything at all. NS&I has also recently reduced the payout on Premium Bonds.
4. Children's easy-access savings
Children's savings accounts work in a similar way to ordinary savings accounts, with the maximum age ranging from around 15 to 20, depending on the account you choose. While these accounts have the advantage of allowing you to contribute and withdraw money whenever you want, any interest earned is liable for tax.
5. Children's regular savings
If you're able to commit to making monthly contributions, then you can often benefit from higher rates of interest with a regular savings account. The top rate currently available is offered by Halifax on its children's regular saver account, which is a 12-month fixed-rate bond paying 6% interest. It requires a deposit of between £10 and £100 per month.
6. Complete an R85 form
In the 2013-2014 tax year each child is entitled to a tax-free allowance of £9,440. Make sure you complete an HM Revenue & Customs form R85, so that any interest will be paid free of tax. Don’t worry if you haven’t done this though, as if your child is paying tax for which they are not liable, you can reclaim it for them using form R40.
7. Know your tax-free limits
If you give your children money and it makes more than £100 a year before tax in interest (or £200 if both parents give money), all this income (not just the income over £100) will be taxed as if it were your own. This limit applies to income from gifts from parents only, not other family members.
8. Start investing
You can hold investments on behalf of your child in a bare trust or a designated account. A designated account will be earmarked for your child but will be in your name and treated as your investment and as such any income of over £100 will be taxed at your rate, whereas a bare trust will be treated as your child’s for tax purposes.
9. Set up a pension
If you're thinking of taking a very long-term approach, you could take out a pension on behalf of your child and pay in regular amounts. You can currently contribute up to £2,880 each tax year, which is boosted to £3,600 including tax relief. When your child reaches 18, ownership of the pension will transfer to them and they can start making their own contributions.