What is the best way to save for your child?

Why should you save for your children?

If we have a cost-of-living crisis now, can you imagine what the next generation will face? While getting on the housing ladder is a distant dream for many people today, for tomorrow’s workforce, it may be unimaginable without significant help. 

Here are a few reasons why it’s a good idea to start pocketing a few pounds for your kids today:

• The average wage is £35,000

• The average house price is £285,000

• The average mortgage deposit is more than £34,500 for a three-bed house

• The average mortgage deposit is around the same as the average annual wage 

How much should you save for your children?

Of course, what you save for your children is up to you. But even if things are tough all around, you can still chip in for their future as and when possible. There are several options for parents and guardians who want to give their sons and daughters a leg up, from the humble piggy bank to formal investments. In most cases, it’s up to you whether you invest £1 or more a week or month or just put a little aside when you have the chance.

Can a child have a savings account?

Most banks and building societies offer children’s savings accounts, which can be opened on a child’s behalf by an adult aged 18 or over. The child must be under 16 years old, and accounts can be opened with as little as £1. 

Typically, the child can manage their account from age seven, although the parent or guardian’s name remains on the account, along with the child’s, until they reach 18. After that, the account is closed, and the balance is transferred to an adult equivalent.

What are the best ways to save for children?

There are several different types of savings accounts for children. These are the main options:

Instant access savings accounts

Instant or easy-access savings accounts operate much like current accounts. You can pay in or take out money as you or the child named on the account like. However, like other current accounts, the interest rates applied to children’s instant or easy-access accounts aren’t usually very competitive.

Best for:

• People who can’t commit to a regular savings plan

• Those who might need to gain access to savings at short notice

Beware: 

• Interest rates are relatively low

• Your child can make withdrawals once aged 7+ on some accounts

Regular savings accounts

With this kind of savings account, you or the child will typically need to pay in some money each month (although there are some where you don’t have to make a deposit each month). Although the amount paid into regular savings accounts can vary, it must be between agreed limits, such as from £10 to £100 a month.

Best for: 

• Those looking for a higher interest rate who can commit to paying in regular sum for a year or more

Beware: 

• The account may only earn interest if you keep the balance above a minimum amount

• With some accounts, withdrawals are only allowed when the account is closed

Fixed-term savings

Fixed-term savings accounts are also known as bonds. This is because they are inflexible – you are told the interest rate, which doesn’t waiver, and must sign up for a set term, such as two, three or five years. 

Best for:

• Higher interest rates – currently, the best ones pay around 5% 

• Rates won’t change if there is a downswing in the Bank of England's base rate

Beware: 

• If there is an upswing in the market, the rates can become less competitive

• If you withdraw any money before the end of the term, you will trigger a penalty that could wipe out the interest earned to date

Junior ISA

A junior cash ISA is just like any other savings account with the bonus that interest earned on the savings is tax-free

Best for:

• Parents, who can save up to £9,000 a year, tax-free, in an account that forbids withdrawals until their child reaches  18

• Those aged 16+ can save up to £20,000 in a standard Cash ISA, plus up to £9,000 in the child version up to age 18

Beware:

• Unless you are likely to profit from the tax-free benefit, an alternative savings or investment platform could earn more

• Your child will have full access to the balance from 18

Child Trust Fund Accounts

Children born between 2002 and 2011 may already have a Child Trust Fund, which the government has since discontinued. If your child has one, you should transfer the fund to a Junior ISA. 

Should you invest for your child?

If there is one thing children have on their side, it’s time. This makes investing a golden opportunity for your little ones. Investing in the markets is risky, but a portfolio can and should flourish over time with the right advice. Here are some of the best options for your children.

Junior stocks and shares ISA

You can open a Stocks and Shares ISA alongside or instead of a Junior Cash ISA.

Best for:

• Parents or guardians who can afford to let a sum of money accumulate over time

• Those who want to invest while avoiding tax on earned interest, dividend payments or capital growth

Beware:

• Investing is a long-term strategy – up-front charges mean it’s probably not the best option if you expect to draw on investments within a year or two

• The account holder can’t withdraw money until they reach 18 

Don’t forget, the annual Junior ISAs allowance is £9,000. So, while you can split £9,000 between the two types of ISA, or put the whole £9,000 in one or the other, the total can’t exceed £9,000 a year.

Junior SIPP

It’s never too early to start saving for a pension. With a junior self-invested personal pension (SIPP), you can start your child on a course that will reap benefits in the long run. 

Best for:

• Earning tax relief – the government normally pays 20p for every 80p invested in a SIPP 

• Flexible monthly payments

Beware:

• There are usually minimum monthly payment limits of, say, £25, but subsequent payments on top of that can be as low as £1.50

• As with any investment, there is the chance that a Junior SIPP won’t grow

Other child savings options

You can also open a Premium Bonds account or even just pop your loose change in a piggy bank. Don’t dismiss the latter, as it also teaches money skills. Of course, money lodged in a piggy bank won’t earn any interest. 

With Premium Bonds, your child can win a cash prize of between £25 and £1 million each month, but the lower the amount you have saved, the lower your odds of winning. Plus, premium bonds don’t earn interest.