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Guide to Children’s Savings

Introduction

It is a striking fact, that while many of us are unwilling to save on our own behalf, we are often prepared to do so on behalf of our children.

Surveys show that while most “normal” investors save for a few years and then give up when other priorities come along, parents saving for children are much more likely to take a long-term approach.

Indeed, one company offering kids’ savings plans, says upwards of 80 per cent of parents keep paying into its schemes 15 or even 20 years after initially setting them up.

Perhaps we should not be too surprised by this: as more and more kids go into higher education rather than leave school and start working straight away, the need to build up a sizeable pot of money to pay for them through their college years becomes even more compelling.

Who does the saving?

One question to consider is whether it is the child or the adult(s) who are doing the saving.

Children may well have different priorities in relation saving, both in terms of access to money, the risk they should be taking for themselves and also the fringe benefits they may need if they are to be encouraged to learn the savings habit.

This will be discussed later. First, let’s focus on the parents.

What can you scrape together?

Many parents are permanently cash-strapped and setting money aside often means making significant sacrifices elsewhere.

If you find yourself in that position, here are some tips that may help:

• Set aside the many small and larger contributions often received when a child is born, placing them in a separate account

• Persuade relatives (and friends, sometimes) to contribute small amounts, maybe as little as £5 every few months, into a savings scheme or account

• Try to do without some or all of your Child Benefits and save that

The Child Trust Fund

Since 2005, the government has offered help to parents with young children through its Child Trust Fund (CTF) initiative.

A CTF is essentially a tax-free fund into which the government contributes £250 shortly after birth, or £500 if a child's parents are entitled to full Child Tax Credit allowance.

An additional £250 payment will be made at age seven and the government is currently consulting over plans for a third payment during a child’s teenage years. The money, which comes in the form of a voucher, can be used to open either a savings account or a so-called “stakeholder” scheme investing in the stock market.

Parents – or relatives and even friends – can then save up to £1,200 a year extra, free of tax, until a child reaches 18. The money will then be available for any purpose, or can be rolled over into another tax-free ISA. See our Guide to ISAs.

For more details of Child Trust Funds, click here

What about tax?

Children have the same personal tax allowances as adults. In the 2008-2009 tax year, these are £6,035 before tax needs to be paid on earnings.

At current rates of interest, a child would need to have between £80,000 and £100,000 saved up in an account to pay any tax.

If you go to open a savings account in a child’s name, take in his or her birth certificate, fill in form R85 (available from the bank or building society) and return it to HM Revenue & Customs to get interest paid gross.

Be careful about how you pay money in: if you pay money into your child’s account, you may have to pay tax if the interest on the gift exceeds £100 per parent (note: two parents equals £200 of interest annually, so divide up the way money is paid into an account if necessary).

Bizarrely, relations can save as much as they like in a child’s account – any income it will simply be counted as part of his or her tax allowance.

At age 16, children can set up their own mini-cash Investment Savings Accounts and place up to £3,600 a year in it, free of income tax. But they can’t open an equity ISA until they reach 18. See our [LINK]Guide to ISAs.

There are also various other tax-free savings schemes, such as National Savings and other accounts, of which more below.

More pages

Page 1: Introduction
Page 2: How to invest

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