Whoever said the best things in life are free obviously didn’t have children. Let’s face it: kids are expensive. But, of course, they’re worth every penny.
Decided it’s time to start saving for your little one? Putting money aside for your child is a great way to prepare them for their future, and can also teach them valuable lessons about their managing their finances.
All parents want to give their child the best possible start in life, but what are the best ways to invest for children? Let’s take a look at some options.
1. Bank/building society accounts
Opening a children’s savings account with a bank or building society is a good place to start; and unlike some ISAs, they offer instant access to funds.
Giving your child control of their money will help them to develop a good savings habit from a young age. Generally speaking, there’s no tax to pay on these accounts, but if your child earns over £100 in annual interest from the money either parent pays in, you’ll have to pay tax on all interest if it exceeds you or your spouse’s Personal Savings Allowance.
2. Junior ISAs
Launched in 2011 to replace the Child Trust Fund, Junior ISAs are tax-free savings accounts for under-18s. There are two types of Junior ISA; cash, where they don’t pay tax on interest earned; and stocks and shares, where the money is invested and they don’t pay tax on capital growth. They can save into one or both types of Junior ISA, and the current limit is £4,080 for the 2016/17 tax year*.
With a Junior ISA, your child can take control of their account at 16, though they can’t withdraw money until they’re 18. Between these years, they can hold both a Junior ISA and adult ISA, which will boost their tax-free savings for two years. If you’re confident your child will manage their money well, a Junior ISA could be a good option. But if you’re worried that they’ll go on a savings splurge the moment they reach adulthood, your money may be better invested elsewhere.
3. National Savings & Investments Children’s Bonds
National Savings and Investments (NS&I) Children’s Bonds can be bought for children under the age of 16 by a parent, grandparent, great-grandparent or guardian. They guarantee returns with fixed levels of interest for five years, and no tax is paid on returns.
One advantage of these bonds is that they are backed by HM Treasury. However, that doesn’t mean that the bonds offer the highest rates of interest, and there are penalties for cashing them early.
Trusts are a legal agreement where you – the settlor – place assets into a trust and nominate a trustee to manage those assets (whether it’s money, buildings, land or investments) on behalf of your child or children, known as the beneficiaries.
There are various types* of trust. A bare trust, for example, gives beneficiaries the right to the assets when they are 18; while a discretionary trust gives power to the trustees, who can decide when and how the assets are divided.
5. Junior Self-Invested Personal Pension (SIPP)
Your child’s retirement may seem a world away, but if you’re someone who likes planning for the long-term, you could consider opening a Junior SIPP. Similar to adult pension schemes, Junior SIPPs are eligible for 20% tax relief; save £2,880 a year and £3,600 goes into the SIPP (which is the limit that can be paid into a Junior SIPP unless your child has earnings of more than this).
However, it’s worth noting that tax benefits and rules depend on individual circumstances, and they are likely to change between now and when your child reaches retirement. Also, like other pensions schemes, the money you save can’t be accessed until your child is 55. You should also bear in mind that the value of investments can fall as well as rise so your child could get back less than you invest.
When it comes to investing in your child’s future, putting aside just a small amount of money on a regular basis can really add up. So, are you ready to start saving?
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