How to give your child a financial head-start in adult life

If you are like most parents, you’ll want the best things in life for your child. And that could include giving them a financial head start in life, where you can. Yet, with so many options and opinions out there, knowing how to save for your child’s future can be challenging. That’s why we have put together this simple overview of three ways you could start saving for your child today.

Savings type: Bank and building society savings account
When can your child access the savings: Immediately or with a short notice period
Potential for investment growth: Poor
Best for: Short-term savings or teaching saving skills
What you need to know:

• Generally, from £1 you can open an account for any child under the age of 18¹. Some accounts require a larger opening sum and regular contributions and in return you could be rewarded with a better interest rate in return.
• Interest rates on these types of accounts have remained low over recent years.
• With an instant access account, you or your child (aged 7 and over) can withdraw money at any time. With a regular saver account, you may have to give notice to withdraw money or be tied in for a length of time before being able to access the savings².
• Children can receive as much as £18,500 from savings without paying tax³. However, you should be aware of the £100 rule for parents⁴ whereby savings given to a child by a parent or step-parent is taxed at the parent’s tax rate (basic, higher or additional) if it generates more than £100 a year in interest. Tax treatment depends on your individual circumstances and may be subject to change.

Savings type: Junior Cash ISAs & Junior Stocks and Shares ISAs
When can your child access the savings: From the age of 18
Potential for investment growth: Average
Best for: Medium-term savings, such as university fees or a first car
What you need to know: 

• A Junior Cash ISA will offer slightly better interest rates than an everyday bank or building society savings account. The big deal is that any interest is tax free.

• Junior Stocks and Shares ISAs hold more risk. You can buy shares, bonds and other eligible investments on behalf of a child. The return on this investment could be higher than a cash ISA. But if performance is poor, you could end up with less than you put in.
• For the 2019/20 financial year, your child’s tax-free allowance is £4,368.
• You can divide your tax-free allowance between a Junior Cash ISA and Stocks and Shares ISA.
• If your child has a Child Trust Fund, you can transfer this into a Junior ISA.

Savings type: Pension
When can your child access the savings: From the age of 55
Potential for investment growth: Good
Best for: Long-term financial security
What you need to know: 

• You can contribute up to £3,600 per year inclusive of tax relief.
• When your child reaches 18, ownership of the pension will transfer to them and they can start making their own contributions.
• The investment has decades to grow and thanks to compound interest, paying in even a small amount every month could mean a tidy sum for the future.
• Any growth is not taxed.
• The value of your investment could go down as well as up.

A regulated financial adviser can help you decide what level of risk you are prepared to take with your child’s savings. Which could mean more for your child when they need it.

¹Saving for your children. Money Advice Service
²What is the best way to save for your child? Money.co.uk
³Children’s earnings before tax (£12,500 personal allowance + £5,000 starting rate for savings + £1,000 personal savings allowance.)
⁴Children and income tax. Which.co.uk 

Taking pension money early is not right for everyone as it will leave you worse off in retirement. Also, tax treatment depends on your circumstances and is subject to change. That’s why it makes sense to get help from a regulated specialist.