Setting money aside and building a nest egg for your child is a great way of helping to secure their future financial well-being. There are many ways you can set up a savings account for your kids. This Moneyfarm guide will help you to find the best way to save money for your children’s future and offers some great tips to help set you on your way.
| Is there a best way to save for a child in the UK? | Several factors affect a parent’s choice, such as financial circumstances and risk tolerance. But, a tax-efficient option is a Junior ISA (Individual Savings Account). |
| How much can I save in a Junior ISA? | £9,000 for the 2023/2024 tax year |
| When can the child access the funds in a Junior ISA? | At age 18 |
| Are there any alternatives to a Junior ISA for saving money for children? | Other options include child trust funds, savings accounts, premium bonds, children’s pensions, and investment accounts |
How do I save for my children’s future?
Starting off by saving a little or a lot doesn’t matter. The most important thing is to begin saving for your child’s or children’s future at the earliest opportunity. However, the cost of raising a child in the UK is taxing, so it may be difficult to set money aside for your child’s future.
First, you must ensure you have enough money to provide your family with a good lifestyle, cover the cost of living, have some money set aside for emergencies, and save for your own future, thinking ahead to your retirement.
There are many demands, so you need to do some careful financial planning because the best way to save money for kids is to save regularly.
Best ways to save money for children
The best way to save money for kids is with an account that offers a good interest rate. With the right sort of savings account, the interest will be compounded every year, and this will help the savings to grow exponentially. The sooner you start, the better. It allows a longer time for compound interest to get to work, and you’ll be amazed at the difference it can make.
There is no one best way to save money for a child. Our incomes, lifestyles, commitments, and life goals are all different. Some of us are totally risk averse when it comes to finance, and some have a wider tolerance to taking risks. All these things will have a bearing on the best way to save money for children’s future.
Let’s take a look at the options open to you.
Children’s savings account options with banks and building societies
One option is to open a child savings account with a bank or building society. They are available in different formats, including easy-access accounts. These are useful for actively involving the child in saving, as both you and your child can contribute. However, easy access flexibility means you get a lower rate of interest.
Regular and fixed-rate children’s accounts offer better interest, some of the best ones offer up to 4.25% AER. Others offer 3.90%, and 3.65%, respectively.
Buying Premium Bonds for Children
Buying premium bonds for children is quite popular. As a parent, grandparent or legal guardian, you can buy them on behalf of your child, and they can be cashed in by the child when they reach age 16.
The downside is that they don’t earn interest, so their real money value depreciates through inflation.
The upside is that the bonds are entered into a monthly prize draw, although the odds for winning per £1 bond are 24,000 to 1. On their own, they are probably not the best way to save money for kids, but as part of a wider savings strategy – why not?
NS&I used to offer children’s bonds, but they are no longer available. If you have already invested in them and they are yet to mature, you can check out your options by visiting the NS&I website.
Child Trust Fund Accounts
It is no longer possible to buy Child Trust Funds. They were launched in September 2002 but were discontinued in January 2011. CTFs were one of the best ways to save money for your children’s futures. The reason that this type of child’s savings account is no longer available was due to the launch of the Junior ISA.
If you still have a child trust fund open, you can continue to contribute up to £9,000 per annum. The child can take over the management of their child trust fund at age 16 but cannot make any withdrawals until age 18.
Open a Junior ISA
A Junior ISA (JISA) is another option. There are two types – the junior cash ISA and the junior stocks and shares ISA.
Saving for your child by opening a tax-free junior ISA has replaced saving via Child Trust Funds (CTFs). However, as explained earlier, it’s no longer possible to open a new CTF.
While the government used to contribute to CTFs on opening, junior ISAs tend to have lower fees and more interest than CTFs. You can read more about the two accounts in the child trust fund vs JISA debate.
The interest earned by junior cash ISAs is relatively low and more on par with children s savings accounts. When you save money, interest rates are important. You will get a significantly better rate of interest with a junior stocks and shares ISA than you will with a junior cash ISA.
You can only start a junior ISA on behalf of your child if you are the child’s parent or legal guardian. You can open both types for the child, one cash and one stocks and shares, but not in the same tax year. Once open, anyone can contribute.
A JISA is one of the best ways to save money for kids. As well as the funds growing tax-free, with no capital gains, withdrawals are also free of income tax.
On the child turns 18, a junior ISA automatically gets converted to an adult cash ISA or an adult stocks on share ISA depending on its original format.
Should I start investing for my child?
Yes, investing for children is a wise thing to do, and the sooner you start saving, the better. Opening a JISA for a baby as soon as possible after birth is the best. The longer the interest has to work, the more growth you’ll get.
Of course, you’ll be faced with the question, what is the best ISA for a baby – cash or stocks and shares – which is the best way to save money for your children’s future?
That is a decision only you can make. Investing money nearly always carries an element of risk. A cash ISA is safer, and although a stocks and shares ISA is potentially more risky, it usually offers a much superior rate of interest.
Can I set up a pension for my child?
Yes, you can set up a children’s pension for our child using the SIPP of Stakeholder pension formats. Whether it’s the best way to save money for kids is arguable.
On the one hand, you will be helping to ensure your child is comfortable in their retirement years, but of course, that seems so far away. On the other hand, the money will be untouchable, at least until the child reaches 55 in adulthood, so it can’t be used for university fees, buying a first car or property etc. The best way to save money for your children’s future would be to do both, of course – a JISA and a pension.
FAQ
Can I open more than one Junior ISA for a child?
No, you can only open one junior cash ISA and Junior stocks and shares ISA for each child, although you can switch providers if you’d like.
Are there any fees associated with a Junior ISA?
The fees are dependent on the ISA provider. Generally, management fees and transfer charges are associated with a Junior ISA.
What are the benefits of a Junior ISA?
Tax-free savings and the possibility for compound interest to increase investment growth over time are two advantages of a Junior ISA.
*As with all investing, financial instruments involve inherent risks, including loss of capital, market fluctuations and liquidity risk. Past performance is no guarantee of future results. It is important to consider your risk tolerance and investment objectives before proceeding.
