Saving for children this Christmas

Instead of loading up with more toys or gadgets to hand out to your children on Christmas Day, how about giving them some financial security instead?

There are plenty of options for building a decent nest egg to help the next generation on their way. Whether it’s for university or a deposit on a house one day.

Saving for children this christmas

When relatives ask what they can buy for your little ones for Christmas you could even suggest they contribute too. Rather than cluttering the house with yet more toys.

Here are the main options for saving and investing for children. They will (hopefully) thank you for it one day…

Children’s savings accounts

There are plenty of standard accounts aimed at saving for children. The most important feature is the interest rate paid. So make sure you choose the highest rate possible to help earn as much as you can on the cash. Happily, these rates tend to be more generous than accounts for adults.

Junior ISAs

A junior version of the regular adult ISA (individual savings account) is available to open as soon as a child is born. You can make contributions up to the annual limit, which is £4,260 for the tax year 2018/2019.

With a Junior ISA, you can invest the money into stocks and shares. Or, if you don’t want to take any risks, into a cash version. If you start saving early, even a small amount could build up to a significant figure, thanks to the magic of compounding.

This is the term used for earning interest on interest - or more specifically in investment terms, generating income from previous income. This is really only true for the stocks and shares version of the product.

As with any investment, the value could go up and down due to market fluctuations. This means it’s possible to get back less than you invested.

Investments should be seen as a long-term form of saving. This gives you the chance to weather the peaks and troughs of the stock market. Money saved in a Junior ISA is locked away until the child reaches the age of 18. If you’ve opted for an investment Junior ISA, this gives the value of the account time to ride out market fluctuations.

Child Trust Funds

Children currently aged 7-16 will have a unique kind of savings account set up in their name - a Child Trust Fund. These accounts were awarded to every child born between 1 September 2002 and 1 January 2011. Parents could choose a savings version or an investment version.

Even if a parent never opened an account, the Government will have set up an account on behalf of their child and paid in a bonus of £250, or £500 for low-income families. Parents, family, friends - and even the child themselves - can save money into their Child Trust Fund, from as little as £10 a month and up to £4,260 a year.

Premium Bonds

Parents (as well as family and friends) can buy the chance to win a fortune for their children. Premium Bonds are issued by the Treasury-backed National Savings & Investments. They cost £1 each – with a minimum holding of £100.

Rather than being paid interest, bond-holders are entered into a monthly draw with the chance of winning prizes ranging from £25 to £1 million. A parent or legal guardian must manage the bonds until the child becomes 18.

The ‘annual prize fund interest rate’ represents the return someone with average luck could get. At the moment this is 1.4%. The numbers are selected randomly at the beginning of each month, just like a lottery, so there is a chance you could win big - or win nothing at all.

One of the biggest attractions of Premium Bonds is that prizes are tax-efficient. But do be aware that tax rules may change in the future.

Pensions for kids

Starting a pension for a toddler or teenager might seem a little premature, to say the least. But the argument is compelling thanks to the generous tax breaks offered by pension savings. Parents (or anyone else) can invest in a self-invested personal pension (SIPP) for a child, up to a maximum of £3,600.

The tax breaks means actually only investing £2,880 – or £240 a month - with the balance being automatically reclaimed from HM Revenue & Customs. The long-term nature of this kind of investment means that there’s plenty time for your money to grow and it could benefit from compound growth.

There is no minimum age so a Junior SIPP can be started from the day the child is born. Control over the investments passes to the child when they turn 18. The money is locked away until they turn 55 - under the current rules.

There are some good options out there for children’s savings accounts. And what can be small amounts now, could build up to a sizeable nest egg for the little one’s future.

Written by Holly Thomas – Financial Journalist


Note: Whilst we take care to ensure Talking Finance content is accurate at the time of publication, individual circumstances can differ so please don’t rely on it when making financial decision. The opinions expressed within this blog are those of the author and not necessarily of OneFamily.

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