How do I save for my children's future?
Whether you're looking for a savings account for your new baby, or you want to find a way to save for your grandchildren, putting money away for children is a great way to teach them about money, as well as start their adult life with some savings.
There are several options available - which one you should opt for will depend on who you're saving for, why you're saving, and what kind of money you can commit to putting away.
Here, we describe each way of saving for a child, along with its pros and cons.
Open a Junior Isa
The Junior Isa is for children under the age of 18. When the child reaches 18, the account will automatically be turned into an adult cash Isa, and the child will then be able to manage the funds.
- All money is tax-free: like the adult Isa, all funds held within a Junior Isa wrapper are free from tax - so parents don't have to worry about the '£100 rule' that applies to children's savings accounts
- Interest rates are much higher than adult Isas: Coventry Building Society offers 3.60% AER and only requires a £1 minimum deposit
- Children can't take out the cash: this is good if you want it to remain saved until they're adults; not so good if you want to give them experience of managing their own money
- You can choose between cash and stocks & shares Isas: you can use all of your allowance on one option, or split it between both.
- There's an annual deposit limit: the maximum you can pay into a Junior Isa is £4,368 in 2019-20, increased from £4,260 in 2018-19. So, if you want to save more cash than this, you'll have to look for alternatives.
- There's no government contribution: the government added £500 to each child trust fund (CTF) on opening, but this isn't the case for Junior Isas. CTFs are no longer available to new customers. However, it is possible to switch a CTF to a Junior Isa - see our step-by-step guide
Find out more in our guide to the best Junior cash Isas.
Buy NS&I premium bonds for children
Premium bonds are a popular investment option offered by National Savings & Investments (NS&I). You can buy any whole-pound amount of bonds between £25 and £50,000, and every month each £1 bond is entered into a prize draw. Then, when the child turns 16, they can have the premium bonds signed over to them.
- Parents and grandparents can buy premium bonds: unlike many savings accounts that only allow money to be paid in by parents, premium bonds are a great way for grandparents to put money away
- You could win £1m: every month, two lucky winners will get the jackpot. Many more will win prizes from £25 upwards
- Winnings are tax-free: even if you win £1m
- You can deposit up to £50,000: if you have a lot of money to deposit, but are restricted from the Junior Isa allowance and tax from savings interest, premium bonds could be answer
- It's fun: children are likely to enjoy checking their bond numbers each month to see if they've won
- You might not win any prizes: it's all down to chance; specifically, a 24,500 to 1 chance
- There's no savings interest: while NS&I says there's an equivalent 1.4% interest on premium bonds, this is an average over the millions of bonds in the pot, taking in someone who wins £1m on their £100 investment, and others who've won nothing on their £10,000
Find out more in our guide to premium bonds.
Set up a children's easy-access savings account
Children's savings accounts work in a similar way to ordinary savings accounts, with the maximum age ranging from around 15- to 20-years-old, depending on the account you choose.
- Money can be withdrawn whenever you like: unless otherwise stated in the account terms, you should be able to make as many withdrawals as you like, without giving any notice
- It can be a good way to teach your child about money: some accounts will have passbooks that allow children to take out money (usually in branch, with a parent present) - by managing their own savings, kids can learn more about handling their own finances
- Interest is lower than regular or fixed-rate accounts: if you want a way of growing your child's savings pot, other accounts could be better
- You may have to pay tax on the savings interest: this will be the case if you, the parent, have paid money into your child's savings account and the interest exceeds £100, the entirety of interest earned will be added to your tax bill
While these accounts have the advantage of allowing you to contribute and withdraw money whenever you want, any interest earned is liable for tax.
Find out more in our guide to children's savings accounts.
Try a children's regular savings account
If you're able to commit to making monthly contributions, then a regular savings account could be a good option.
- Interest rates can be pretty generous: the top rate is currently 4.5%
- You don't have to pay in much: the top three accounts allow a maximum of £100 to be paid in per month
- There are usually stringent withdrawal limits: withdrawals will either be unavailable, or you'll face losing interest
- You may be liable to pay tax: again, the £100 rule applies to savings interest
- It's no good if you want to make more sizable deposits: the low maximum threshold for monthly payments may not suit everyone
They're ideal for savers who are saving for something specific and wish to drip-feed cash into their account in a disciplined way.
These accounts will usually limit the number of withdrawals you can make each year and restrict the amount of money you can invest each month.
Be careful not to miss a payment or exceed the limit on withdrawals, as doing so can cost you interest.
Find out more: Different types of savings accounts – learn about the alternatives
Should I start investing for my child?
If you want an alternative to cash savings, investing money for your kids could be a good option.
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.
Any income of more than £1,000 will be taxed at your rate, whereas a bare trust will be treated as your child’s for tax purposes.
- Investments can garner bigger returns than cash interest: while there are very few children's savings accounts offering upward of 3% AER, investing in stocks and shares could beat that rate
- There's plenty of time for investments to grow: if you start investing when your child is young, you have a better chance of your investment growing - and overcoming any rocky patches that can have more of an effect on shorter-term investments
- If there's a dip in the market, you could lose money: the success of your investments are dependent on the market, and any dips will be reflected in your balance - there's no guarantee you'll get back the money you invested
- Savings may not be covered by FSCS: unlike saving with a UK bank or building society - where FSCS covers £85,000 per person, losses you make from investments may not be eligible for compensation
- You may have to pay investment platforms: there may be monthly or annual fees to pay to use some investment platforms, along with management fees for buying and selling shares. If you take a more hands on approach and decide to manage the fund yourself, other fees may apply.
Find out more: are you ready to invest?
Can I set up a pension for my child?
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.
- The money will be a boost to your child's retirement: your child will be able to access the money saved in the pension when they reach 55 - at a time when people likely be glad of any savings they can get
- Your child can take over when they're 18: when they reach 18, your child can continue to make pension contributions - starting a good financial habit for the rest of their adulthood
- The money won't be squandered: many parents worry about what their children might do with their hard-saved cash - with a pension, the child won't be able to access the money until they reach pension age
- Children get an extra 20% tax relief on contributions: if you pay in the maximum £2,880 each year, there'll be an added £720 in tax relief for a total of £3,600. What's more, when they come to draw the pension, they'll get a 25% tax-free lump sum
- There's huge growth potential: saving for retirement from birth gives a long period of time for undisturbed compound growth
- Your child won't be able to use the money for a very long time: while money in retirement will be much-needed, your child won't be able to use the money for any other life milestones, such as buying a house, or getting married
- Maximum contributions are relatively small: you can contribute up to £2,880 a year for a child's pension - which isn't much in comparison to what you can pay into an adult pension
- Pension income is taxable: aside from the 25% tax-free lump sum, your child may have to pay income tax on pension income when they eventually come to draw it - this wouldn't happen if the money was saved in an Isa, for example.
Find out more: tax relief on pension contributions explained
What are NS&I children's savings bonds?
NS&I used to sell children's bond, but they are no longer on general sale, and as of 26 April 2018 anyone with children's bonds that have matured won't be able to renew them.
NS&I says it will write to anyone with a children's bond 30 days before it is due to mature, outlining options on what you can do with the money - the options available will depend on how old the child is when the bond matures.
Find out more: What is National Savings & Investments?
What are the income tax rules for children?
Most children don't earn a salary or any other income, so they can receive as much as £18,500 from savings without paying tax.
Like adults, children are entitled to a tax-free personal allowance of £12,500 in the 2019-20 tax year; the £5,000 starting savings allowance at 0%; and the £1,000 personal savings allowance.
Previously, parents would complete HMRC form R85 so that any interest would be paid tax-free.
This form is no longer necessary because all savings income from your bank or building society accounts is paid without tax deducted (to coincide with the introduction of the personal savings allowance).
The only catch is the '£100 rule for parents' whereby savings given to a child by a parent or step-parent is taxed at the parent's tax rate (basic, higher or additional) if it generates more than £100 a year in interest.
Importantly, this doesn't apply to grandparents and other family members or friends.
Find out more: Children and income tax – get to grips with the rules