The sooner you start saving for your child's future the better. Starting early will give you the best chance of giving them a great financial head start in life.
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Start a savings account for your child
Whether you have a lump sum to put away, or you would like to start saving regularly, there's a wide choice of savings accounts on offer:
1. Consider a savings account especially for children - children's savings accounts operate just like any ordinary savings accounts. If your child is under seven, the account must be held in the parent's name (with the child's initials attached). When your child reaches seven, you can open a children’s savings account in his or her name alone.
Banks and building societies tend to offer better rates for children's accounts than they do on most adult accounts, so it's normally worth opening one even if you don't have control over how your child uses it. But do make sure you shop around for the best buy when the times comes, particularly now when savings rates are pretty low across the board.
2. Put some money in a special regular saver account - If your child gets regular pocket money, or you like to put some money away for him/her each month, a regular savings account could be ideal.
You pay in a regular amount into the account each month and your child will earn a preferential rate of interest.
Three important things to note - you can't open a regular saver with a lump sum, you can't make withdrawals during its term (usually a year) and should you fail to make a deposit each month the account is converted to a bog-standard savings account (with the rate reduced accordingly).
That said, even in today's low interest environment, it's still possible to earn 6% on this type of account.
3. Think about putting some cash away in a fixed rate bond where it can be locked away for a year or more.
Unlike regular savings accounts you can put lump sums into bonds - the disadvantage being that you will need to leave the cash untouched for at least a year to earn the advertised rate of interest.
They usually pay a higher rate of interest than an instant access account. There are a number of bonds on the market, some of which mimic the access afforded by the Child Trust Fund by not allowing access until the child turns 18, while others last for 12 months.
Find a market-leading savings account.
Get tax-free interest for your child
Children can earn £100 in interest, tax-free, every year on money given to them by each parent or step-parent. What’s more, grandparents and other adults who give money to children do not have to pay tax - even if the interest exceeds £100 a year.
To get your child’s interest paid tax-free, all you need to do is submit a form R85 to your bank or building society.
If the money going into your child's account was given by a parent, you need to be careful the interest earned on it is not more than £100 per year. Earn more than this and you will be taxed on the interest at your highest rate of tax. In other words, if you're a higher rate taxpayer, your child's savings could be taxed at a rate of 40%.
However, this rule applies to each parent so be clear who the money is coming from in each case. And with interest rates so low, your child would need to have saved a lot before you fall foul of it.
If your child receives regular sums from relatives other than parents it may be worth opening a separate savings account to keep it absolutely separate for tax purposes.
Junior ISAs
The Junior ISA – a child-sized version of the adult ISAs – launched in 2011.
A Junior ISA is a tax-free account aimed specifically at children and can be opened from birth. Any savings that are deposited will be locked away until the child reaches adulthood when they will get access to the money.
You can save up to £3,600 a year tax free in either cash or stocks and shares.
You can see who's currently offering the best rates in our article The best Junior ISAs.
Child Trust Funds
If your child was born during the Child Trust Fund era, they would have received (depending on your income) up to £500 tax free from the Government. Following the launch of Junior ISAs, you can now save an additional £3,600 a year into a fund in this tax year.
If you're not happy with how the fund is progressing, remember you always have the right to change your mind. This is true no matter where you have chosen to invest the voucher.
Switching is easy. You can change the provider who manages the fund, or just alter the way the money is invested.
If you want to change providers, all you need to do is sign up with the new provider. They will then let the existing provider know.
Start a pension for your child
The sooner you start saving in a pension the better. But did you know you can now open a stakeholder pension for your children as soon as they're born?
Pensions love nothing more than decades and decades in which to grow. If you open a stakeholder pension before your child's first birthday, it could stay invested in the stock market for 65, or even 70 years, before they reach retirement.
This kind of timescale can work wonders for the value of a pension pot because your child can take advantage of compound growth over many years, turning their contributions into a fortune.
You can save up to £3,600 gross each tax year for each child. That's £2,880 out of your own pocket with the tax relief they'll get back from the government added on top.
Children qualify for tax relief at a rate of 20% even though they are non-earners. So to put the maximum in each year, you pay £2,880 while the taxman contributes an extra £720 in tax relief bringing the total to £3,600.
You can also save for your child without spending any money of your own. For example, you could think about investing the Child Benefit you receive for your child in their stakeholder pension.
In the current tax year, Child Benefit is paid at a rate of £20.30 a week for your eldest or only child, and then £13.40 a week for each of your other children.
This can build up to a pretty decent pension pot, given that you haven't shelled out any extra money yourself, and contributions stop entirely when your child is 16.
When your children start earning encourage them to continue saving in the pension scheme themselves. This is the best way of ensuring a decent standard of living in retirement.