What are the best ways to save for your child?

Putting money away on behalf of your child can provide a wonderful gift for their future. Whether you’re looking to help them onto the property ladder, cover their University fees or something entirely different, here are some of the best ways to save for your child. 

One of the best ways to save for your child can be to open a Children’s Saving Account.

A Children’s Saving Account can be opened by, or on behalf of, a child under the age of 18 at most banks and building societies.

The fact that they usually pay a slightly higher interest rate when compared to an adult savings account, make them one of the best ways to save for your child.

Nowadays, tax isn’t deducted before interest is paid on savings accounts including children’s. However, if the interest your child gets is more than £100 in a tax year, as a parent you’re liable for any tax due on it.

You won’t need to pay tax if the interest is within your Personal Savings Allowance. This is £1,000 for basic-rate tax payers and £500 for a higher-rate tax payer.

Consider a Junior ISA

A Junior ISA is a tax-free savings account that is only available to young people. In the 2018-19 tax year, parents and other relatives can save up to £4,260 into a Junior ISA.

As with standard ISAs, Junior ISAs can be held in cash as well as stocks and shares. However, each eligible child can only have one cash and one stocks and shares Junior ISA.

These accounts usually pay a high interest rate and let you deposit money when it suits you.

It’s worth noting that you will not be able to access the money you put into a Junior ISA until your child reaches 18 years old. The Junior ISA will then turn into an instant access ISA in your child’s name.

Child Trust Finds (CTF) were stopped in 2011. If you have savings in a CTF it’s likely that you will benefit from reduced charges and a greater choice of investments by transferring to a Junior ISA.

Keep more control by using your own ISA Allowance

If you want to keep more control, you may choose to use your own ISA allowance to save for your child’s future. In 2017-18, you and your spouse can each save up to £20,000 into an ISA tax-free.

Unlike Junior ISAs, you will normally be able to take out the money when you want to but you should clarify this with your provider. You can invest in cash and/or stocks and shares.

However, it is worth bearing in mind that saving in your own name on behalf of a child is not always recommended. This is because Children’s Savings Accounts and Junior ISAs tend to offer higher interest rates and additional tax benefits which you may not be eligible for under your own name.

Take the long-term approach and start a pension on behalf of your child

You could also consider taking out a pension on behalf of your child and pay in regular amounts.

Whilst this is certainly a very long-term approach, investing a little bit now could make a huge difference to your child later on thanks to the compounding of any investment growth over many years.

Setting up a pension on behalf of your child is a very tax-efficient way for you to save too! At the moment, you can pay in up to £2,880 a year into your child’s pension which is boosted to £3,600 due to tax relief. They are eligible for this relief even though they don’t pay tax.

Ownership of the pension will be transferred to your child once they reach 18 and they can then start making their own contributions. However, they will not be able to access the funds until they are at least 57; like we said at the start, this is a very long-term approach.

For some parents, the fact that a pension cannot be accessed until later may actually be a positive. This is because poor financial decisions are most commonly made earlier in life such as in our late teens or early twenties.

You can read more about Junior Pensions (SIPPs) by clicking here.

Set up a trust on behalf of your child 

A trust is a legal arrangement, where you give cash, property or another investment to someone so they can look after it for the benefit of a third person (in this case your child).

Setting up a trust can also be one of the best ways to save for your child if you want to be in control of when they get they get the money or assets. In short, a trust avoids handing over large sums of money or valuable assets whilst the beneficiaries are relatively young and vulnerable.

When you put something into a trust, providing that certain conditions are satisfied, you don’t own it anymore. One benefit of this is that it enables you to gift part of your wealth to your child whilst potentially avoiding Inheritance Tax.

Life Insurance & Income Protection

Taking out adequate Life Insurance and Income Protection is an essential part of saving for your child’s future but something that is very often overlooked. These policies can ensure that your child would still be able to enjoy the same standard of living should you no longer be able to provide for them.

Even if you already have policies in place, you should review these regularly to ensure that they meet your current needs and requirements.

**Please note that this article is for information purposes only and is not advice. We recommend that you contact one of our Independent Financial Advisors to discuss your personal circumstances before taking action.

If you’d like advice on the best ways to save for your child, call our team of experts on 01244 347 583 or email us at: info@innesreid.co.uk.

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