We all want the best for our children and that includes giving them a good start when it comes to money. Stashing cash into a piggy bank sounds like a good idea, but let’s face it, it ends up being raided by parents to pay for the odd takeaway or by the children when they want to buy something.
Putting money away for the long term is important. It will not only allow your savings to grow but also set your children up for university, to buy their first home or even get married.
Most people don’t look past high street bank accounts but are there other ways to save that are more rewarding when it comes to returns on your investment. With interest rates at all-time lows, it pays to look at alternatives to the bog-standard savings account.
1. Junior ISA
You’ve probably heard of these if you have a young child but may not have taken the plunge and got round to opening one. Junior ISAs are a tax-efficient way of saving for children under 18. You can currently save up to a maximum of £4,128 this tax year either in cash or an investment ISA, although you can also split between the two types if you want.
A cash ISA will simply pay you interest on your savings, while an investment ISA puts your money into investments such as shares or investment funds, meaning you could end up with a higher return over the long run. If your child is still very young, and you can invest for at least five years and preferably 10, then an investment ISA is a more rewarding option. Remember that investments can go up as well as down, so ask yourself what your attitude to risk is.
If you put away £100 a month for a child born at the start of this year, according to Fidelity’s growth projections, a junior ISA pot could be worth £37,887 by the time they’re 18 based on 8% annual growth, or £28,677 for a 5% growth. You also need to take into account annual fund management charges and any platform fees — if they are too high, they can eat into your returns.
Although junior ISAs are a fantastic way to save, it’s worth knowing that once the money is put in, it can only be accessed by your child when they are 18 so you will have to hope they do something sensible with it!
2. NS&I Children’s Bond
If you want to save for the long term with guaranteed tax-free returns and no risk, then the NS&I children’s bond allows you to save five years at a time with a guaranteed interest rate of 2% on savings between £25 and £3,000. If you put away £1,000, it would be worth £1,104.08 in five years’ time.
You can take the money out at any point, but you will have to pay a penalty equal to 90 days’ interest on the amount you cash in.
NS&I is backed by the government, so your money is safe.
3. Savings account
If you want to start saving regularly but want access to your money, then some regular savings accounts for children pay a good interest rate. For example the Halifax Kid’s Saver account, which pays 4% if you pay in £10 a month, or Saffron Building Society’s Children’s Regular Saver account, which pays 4% interest on your savings.
When opening a regular savings account, always check the terms and conditions, such as minimum and maximum payments required, what the withdrawal allowances are and how long the interest rate offer lasts – many will last around 12 months, after which you should shop around for another rate and move accounts.
Yes, believe it or not, it is possible to start a pension for your child, and if you really are thinking long term, then this will really set them up. Retirement is becoming increasingly expensive, so if you have the money, a pension can be a tax-efficient way to save for your children’s future. The maximum you can pay in is £2,880, but this is topped up by the taxman taking your savings to £3,600.
You could, of course, maximise the allowances of both a junior ISA and a children’s pension to make the most of the tax-free savings.
As with junior ISAs, always check for fees as anything too high can eat into your returns.
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