The savings can clearly add up to a significant sum, and the question of how to make a child’s money work its hardest will understandably be on the mind’s of many parents and guardians.
Express.co.uk recently asked Kay Ingram, Director of Public Policy at the national financial planning group LEBC, to share some expertise.
The Chartered Financial Planner exclusively told Express.co.uk: “Before choosing a savings plan for a child it is important to consider what the savings objective and
timeframe will be, when you want the child to have access to the savings, and if larger sums are involved, consideration of the taxation.”
Regular cash savings
“For short term savings there are several children’s savings accounts which offer fixed interest rates for a fixed period on regular savings. Rates are well above those on offer to adults, 3.5 percent to 4.5 percent currently.
“Limits on the savings of around £100 – £200 per month are typical. Withdrawals are not allowed in the fixed period and on maturity the proceeds are paid into an instant access account.”
These pays less than the regular savings fixed rate but still above adult savings rates, up to three percent being available currently.
“Anyone can add money into these accounts, but if not the parent, will need their
permission to do so and parents will usually need to give permission for withdrawals over a certain amount, typically £50, but with the child being able to pay in and withdraw up to this limit.”
Fixed Rate Bonds
“Banks and building societies offer fixed rate bonds on lump sum investments, money is tied up with access at the end of the term.
“The longer the term the higher the interest rate. However, rates may not be more than those available on an easy access account, making the restrictions on access within the fixed term unattractive.”
Junior ISAs (JISAs)
“For longer term savings or larger lump sums a Junior ISA (JISA) enables the child to save tax free up to £9,000 per year either in cash savings or stocks and shares.
“As these are longer term investments, a stocks and shares JISA is more likely to beat inflation and maintain the real spending power of the savings but can go down in value too.
“16- and 17-year olds can invest in both a JISA with up to £9,000 and an adult cash ISA with up to £20,000.”
If you can’t see the poll below, click here.
Control and access
“From 16, children can control the JISA account and have access from 18.
“If parents, or others giving the money, are concerned about granting access at this age then other solutions may include; investing the funds via a trust, which restricts access to a later age, or funding pension savings which cannot be accessed until the child is in their late 50s.
“Setting up a trust may require legal advice and the trust will usually pay tax on the savings, which it can reclaim when funds are distributed to a non-taxpayer.
“This means it is likely to only be suitable where larger sums are being invested.
“For those who want to restrict access to the longer term, saving into a pension plan is possible. Non-earners can pay in up to £2,880 per tax year and receive a 20 percent uplift in their savings of up to £720 per year, in tax relief.
“This includes all non-taxpayers from age zero to 75. Both regular savings from £20 per month and one-off sums can be added within these limits.
“Access to the funds are restricted until the child is in their late 50s but grow tax free in the meantime.”
“Children have allowances for income tax and capital gains tax of £12,570 and £12,300 per year respectively before any tax on their savings and investments is due.
“However, if a parent is the source of the invested savings the income tax allowance is limited to £100 per year, with any amount over this being taxed as the income of the parent.
“Junior ISAs are tax free with no income tax or capital gains tax charged on the income and growth.
“Pension plans provide tax free growth while the fund is rolling up and tax relief at 20% is added to the savings made. When funds are drawn out up to 25 percent is payable tax free with the balance taxable as income.”
Tips on children’s savings
For those starting out on the road of teaching their little ones to save, the task can seem daunting.
James Padmore, head of money at comparethemarket.com, shared some tips, exclusively with Express.co.uk, for helping children develop a healthy relationship with money.
So, what does he suggest for parents and guardians?
When talking about money, do it in a way your child will understand
“When it comes to explaining the benefits and repercussions of spending vs saving, use language your child can understand and would use themselves – this will help the topic resonate with them,” he said.
Teach them the importance of saving
“If your child really wants a new video game but spends their pocket money every week, there’s an opportunity to teach them about the value of saving.
“If there’s something in particular they want, get them to print off a picture of it and hang it on their wall.
“You can then help them to work out how long it will take them to save the money.
“That way, they’ll have something to work towards and will be able to make a more informed choice as to whether they want to spend some each week or put it all into saving towards something bigger.”
Transfer their pocket money into a bank account
“If you have older kids, setting them up with a bank account and debit card will help them learn how to manage their money digitally.
“Alternatively, you could kit them out with a prepaid card.”
Avoid giving them an advance
“While it can be tempting to dish out an advance on pocket money if there’s something your child really wants, they won’t learn about the value of saving.
“If you do decide to give an advance, draw up a repayment plan to help them learn more about lending, borrowing, and paying back.”
Provide them with ideas to make their money
“It’s a good idea to provide your child with ideas on how to make money, so they can build a relationship between effort and reward.
“Whether that’s through tidying their room, putting their clothes in the wash, emptying the dishwasher or washing the car.
“These additional ways help to reinforce that they need to earn their way and that they can meet their goals if they put the time into it.”
Understand that spending is inevitable
“Of course, you want your child to understand the importance of saving, but it’s also good to encourage the development of a healthy, balanced attitude towards money, and that also involves spending.
“Let them know it’s ok to spend – provided they can afford it, and that they’re buying something they really want or need.
“This will teach them to start making financial decisions independently.
“Should they spend their money straight away on the first thing they see, or would saving up for something they really want be a better choice?”
This post originally appeared on Daily Express :: Finance Feed