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Children don’t come cheap! Further and higher education fees are expensive and it’s very difficult for young people to get on the property market now, so it’s a wise idea to start saving for your child’s future as soon as you can to provide them with a nest egg that will help them in their early adulthood. This may seem easier said than done as even the everyday costs of bringing up children are becoming increasingly higher, making it difficult to plan ahead financially for the future. However, with a bit of discipline and knowledge of what financial products are available for children and young people, it’s amazing how much you can save. Open a bank account for your child Most parents open a bank account for their children as there are many high street banks that offer special children’s savings accounts. The key features of these include a children’s club with newsletters, competitions and goodies such as piggy banks, stickers and badges and soft toys, which the kids will love. It doesn’t matter if you don’t think you can afford to make regular payments into the account – just do so whenever you can. If you at least have a bank account already opened for your child, it makes it easy to just deposit money whenever you are able. However, it’s good to try to put cash into the account regularly. Make it part of a routine – for example pop into the bank when you’re out at the shops on a Saturday morning, set up a standing order from your current account, or transfer your weekly child benefit as soon as it arrives. The key to savings is that every little helps – it accumulates very quickly. Tax allowances Children’s bank accounts aren’t exempt from tax – but they have a certain tax allowance under which they can save for free. If their income (from interest as well as deposits) exceeds the threshold, they’ll have tax deducted from the interest they make just like with an adult bank account. Up to just over £5,000 can be made in any one financial year before the child’s account will be subject to tax, although this only applies if the money is given by people other than the child’s parents. Parents can only deposit £100 per parent per year tax-free (to stop them trying to use child bank accounts for tax evasion purposes). You’ll need to complete an R85 form from Her Majesty’s Customs and Revenue to ensure that tax isn’t wrongly deducted from the interest. Sometimes it can be easier and less confusing to open two bank accounts for your child – one for deposits from parents and one for deposits from others. Child trust funds The government started offering £250 vouchers to new parents in 2005 to encourage them to save for their child (with an additional £250 upon the child’s seventh birthday). There are a variety of ways in which these £250 vouchers can be used, but all must be saved or invested in some type of government-approved child trust fund to be held for the child until they reach 18. These child trust funds allow up to £1,200 to be saved or invested tax-free. The first type is a straightforward savings account. The second is an investment account, which invests the money in stocks and shares. The third is a combination of the first two. It’s known as a stakeholder account When investing in the stock market, money is of course always subject to risk as the economy can fluctuate up as well as down. Money invested in stocks and shares could potentially make a great deal more than putting it in a high-interest savings account but at the same time it could just as easily be lost, whereas money deposited into a savings account cannot decrease in value. Although the risk is higher with stock market investments, they are intended for long-term rather than short-term saving, and in general any falls over the long-term period tend to be countered by higher increases overall. However, there is no fail-safe guarantee of this and it’s not always accurate to use past trends to indicate future performance. Most providers of investment products will deduct an administration charge for management of the fund, so this is something else to bear in mind if considering going down the investment route. In between the investment option and the savings option is the stakeholder account. With this option, the money is invested in the stock market until the child’s 13th birthday, at which point it is moved into lower risk investments. The purpose of this is to help minimise any possible loss as the child’s 18th birthday approaches. This can be very reassuring, but on the other hand if the performance of stocks and shares increases over these five years, the fund won’t make as much money as it could have done had it stayed invested in the higher risk options. Most of the major building societies banks and financial institutions offer child trust funds, which are closely monitored and regulated by the government. However, this doesn’t mean that they’re all the same – there can be significant differences in the level of charges for managing the account as well as terms and conditions such as minimum deposit amounts and frequencies. As with any major financial decision, you should always consult an independent financial advisor for professional advice on the best way to save for your child’s future. This article is copyright protected and is not for republishing |
