There are six main types of savings for children. This article aims to help you decide which sort of account will work best for your family. It looks in detail at each option: the tax implications, when the child can access the money and how flexible it is.
The article Saving for children – the big questions looked at what you should think about before choosing how to save: how much you can afford, how long to lock the money away for and whether the savings should be in cash or equities.
Types of savings for children
The following table gives an overview of the types of account:
Save the money in parent’s account
This gives you complete control over when (and if?) you hand over the money. If your own income falls you may need to use this money. If coming up to 18 your child seems immature then you keep it for a few years longer when he will have grown up a bit.
The main downside is that you have to pay tax on the money at your normal rate, but you may have tax-free options available. If you don’t use your full ISA allowances every year, you can save it in an ISA and keep a record of how much of the money is earmarked for the children. If one parent doesn’t work, then savings in their name may be tax-free.
Other potential issues arise because the money is in your name: it could affect any benefits you claim; might increase inheritance tax if you die; and would be lost if you have to go bankrupt. But for most people the ability to retain control over the money beyond the age of 18 is likely to seem more important than these.
Pro – you keep complete control; flexibility about cash or equities
Con – you have to pay tax unless you can shelter it
Conclusion – best choice if you are very worried about the child having access at 18
SIPPs (Self Invested Personal Pensions)
You can save up to £3,600 a year in a SIPP for a child. It is tax-free and there is tax relief from the government, so you only have to contribute £2,880 and it will be grossed up to £3,600. However the downside is that the money can’t be accessed until 55 …
This is a high price to pay for worrying that an 18-year-old might not be responsible. You can imagine your child in their late 20s wanting to start a family and telling you they wished they had those savings right away as a house deposit. If you are planning on helping your child with uni fees and a house deposit and still have money left over, then a child SIPP might be a good idea – most SIPP providers offer them. But otherwise, I think you should look at the other savings alternatives.
Pro – tax man adds to the money, not accessible at 18
Con – not accessible until 55!
Conclusion – avoid unless you are making a lot of other savings too
Junior ISAs and Child Trust Funds
Junior ISAs were introduced in 2011. Tax-free, they function in a roughly similar way to adult ISAs – a child has a limit of £3,720 in 2013-4 which can be spilt between a cash and stocks and shares ISAs
They have to be opened by a parent. The child can take over managing the account at 16 but can’t withdraw the money until 18.You don’t have to contribute every year but money can’t be taken out of one. They can be moved to other providers – make sure you follow the rules on switching. At 18 they can be rolled into an adult ISA and the idea of starting your child with an ISA-savings-habit for life is very attractive.
MoneySavingExpert has a guide to the top paying Junior Cash ISAs. There is a list of Junior Stocks & Shares ISA providers here but the most important factor is what you choose to invest in. My inclination would be to use AJBell’s YouInvest and invest in ETFs.
Pro – tax-free, can be rolled into adult ISAs later, can be used for cash savings or equity investments
Con – accessible at 18
Conclusion – a very good, flexible choice if you aren’t worried about access at 18
If your child was born between September 2002 and January 2011, they can’t have a Junior ISA but have to have a Child Trust Fund. CTFs can be switched into a Junior ISA from April 2015. I suggest that you save in your child’s CTF for now and switch to a Junior ISA then, as Junior ISAs are more flexible, the rates tend to be better and the charges lower.
Bank account in child’s name
There are a range of bank and building society accounts on offer – MoneySavingExpert lists those offering the best rates. Check when the child has access to the money, this is typically at 16 but can vary.
These accounts are taxed in theory, but few children will have an income greater than their tax-free personal allowance (£9,440 in 2013-4). If you complete a R85 form, which you should be given by the bank when you open the account, tax won’t be deducted by the bank.
There is one large complication. If the money going into the account comes from the parents, then if the interest on that money exceeds £100 a year it is taxed as though it is the income of the parent. At current low rates of interest, this happens when you have about £4,000 in total in the account, but if interest rates rise it will happen on lower amounts. This is even more of a hassle if there is also money in the account from someone else as that is not taxed.
I suggest that you shouldn’t mix money from parents and anyone else in one of these accounts – get two different accounts if necessary – and parents should avoid using these accounts for more than say £20 a month. If you and other relatives want to save a lot, then parental money should go into Junior ISAs and other people’s money should go into bank accounts.
Pro – simple high street accounts, often tax-free
Con – accessible at 16 usually, big tax complications if parents save a lot of money in these
Conclusion – good for small sums and for money from grandparents or other relatives
Premium Bonds can be cashed in by the child when they get to 18. The money paid out on Premium Bonds gives a very poor rate of return for non tax-payer so they aren’t good investments for children. And if you have more than one child, think what might happen to family harmony if your 17-year-old son gets a huge win and doesn’t see why he should share it with his 8-year-old sister!
Pro – risk free, minute chance of a large win
Con – very poor rate of return, accessible at 18
Conclusion – avoid
NS&I Children’s Bonds
NS&I Children’s Bonds pay a fixed rate of interest (currently 2.5%) for 5 years, after which the money can be withdrawn or rolled into the next issue. It’s risk free and tax-free. If you have used up the Junior ISA allowance and still want to give more money, then this is a possible home for £3,000 (the current maximum holding) that won’t have any effect on the parent’s tax bills.
Pro – risk free, ok if not brilliant rate of interest
Con – £3,000 maximum holding, accessible at 18
Conclusion – sensible, tend to appeal to grandparents