Saving for children – the big questions

Every parent wants to save for their children’s future. This article looks at some issues you should consider: how much to save each month, when the child should get the money and whether to keep it in cash or equities.

There are lots of different ways to save for children in Britain – thinking about what matters most for you will make it easier to decide between the alternatives. The next article How to save for children looks at the different types of account.

Should you even be saving for your children?

It’s a serious question. If you have debts, or a large mortgage, or poor pension arrangements, then your own finances should be your top priority.

Your children will be able to get student loans and grants to get them through uni – when you are retired no-one is going to lend you any money to make your life easier. As parents you owe it to your children to give them a loving home and to encourage them to get a good education, but not to put your own future at risk.

The current limit for Junior ISAs is £3,720 a year, but very few parents can save that much, so you shouldn’t see this as a suggested target unless you are very well off. If you can put by £25 a month that will add up to a good nest egg that will make a big difference to a young person’s future. Most parents should probably be using money over that amount to pay off their own mortgage or add to their own pensions.

Grandparents and other relatives may also want to contribute to savings.

Should your child get the money at 18?

Saving for children - should the money be locked away?

When should your child be able to access the money?

An 18-year-old may have excellent uses for the money  – paying for a deposit on somewhere to rent, buying a laptop they need for uni, getting driving lessons etc. But many parents worry about their hard-earned savings being frittered away before their child, who is now legally an adult, really understands the value of money.

If you don’t want your son or daughter to have access at 18, then there are two alternatives: SIPPs and saving for children in an account in your own name. These are looked at in detail in the next article.

Some people suggest opening other sorts of accounts and not telling the child when they get to 18. This isn’t a good idea, not least because your son or daughter may unwittingly commit fraud if they apply for any benefits and don’t declare savings in an account in their name that they don’t know exists.

A family trust (not to be confused with a Child Trust Fund) is another way of delaying access to the money beyond 18. However the set-up costs and the ongoing tax charges are high. If you are talking about more than, say, £1m, then you need to look at the options and the Inheritance Tax implications – talking to a STEP practitioner would be sensible. Much less than that and it’s unlikely to be worth it.

Save in cash or invest the money?

How much should be saved as cash and how much to invest in stocks and shares depends on your own attitude to risk and how comfortable you feel with investing.

But 18 years is a long time. Inflation is likely to eat away at the value of the savings in a cash account. Equities would be more likely to keep their value, however there is the risk that the stock market won’t do well.

My own feeling is that your priority should be that your child should have a reasonable pot of cash, say £2,000-£5,000. But if you expect to save more than that per child, then you probably should be putting some of it into equities.

The different options for saving for children

There aren’t ‘right’ answers to the questions on this page. But if you now have a feel for what you want to do for your family, the next article looks at each of the savings options in detail:  what age the child will get the savings at, the tax implications, whether the money is saved as cash or invested in equities and how flexible each option is.

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