When a new baby arrives, you have a lot more to think about than what money your child might need when it is fully grown, but a bit of planning now could make a huge difference to your child’s future.
Making the decision to set money aside for your child is easy, the hard part is working out where to put it. You have several options and which you opt for will depend on your broader financial circumstances and how much you trust your child.
The first thing to know is that children are viewed exactly the same as adults when it comes to the taxman.
They pay income tax, capital gains tax and dividend tax just the same as you or I. They also benefit from tax relief including the savings allowance, personal allowance and pensions the same as an adult would too.
So, you can’t use your child to shelter your own wealth from the taxman.
Obviously, a child is unlikely to earn more than the personal allowance (£11,850 in the 2018/19 tax year) and therefore are probably not going to have to pay any income tax.
But, if you are their parent you can’t stick money in an account in their name to reduce your own income tax bill – if that account earns more than £100 per tax year it will be taxed as if it belongs to the parent.
There are four main savings options for children. Here we’ll explain each of them and run you through their pros and cons.
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Junior ISA
This is the one you are probably most familiar with. It works much like an adult ISA in that the money held within it can grow free from tax. But, unlike an adult ISA there is no easy-access option. Money paid into a Junior ISA cannot be accessed until the child turns 18.
Up to £4,360 can be deposited into a JISA this tax year with anyone able to contribute towards that – although the JISA has to be opened by a parent or guardian.
You can choose between a cash JISA or an investment JISA just as with an adult ISA.
The top-paying cash JISA available is 3.6% from Coventry Building Society.
Alternatively, all the major fund brokers including Charles Stanley and Hargreaves Lansdown offer Investment JISAs. Which is best for you will depend on how much you plan to invest and how actively you want to manage the account.
The big attraction of a JISA is its tax-free status. While a child is unlikely to earn enough money to pay tax, they may quickly start paying tax when they get older.
When a JISA matures it is automatically transferred into a cash ISA meaning the money within it maintains its tax-free status until it is withdrawn, so will remain tax-free even when your child starts earning and paying tax.
The big drawback with a Junior ISA – aside from the money being locked away – is the fact the balance of the account belongs to your child and when they turn 18 they will be able to access it and spend it on whatever they like.
You may hope they put it towards a first home or further education, but they could blow it on two weeks in Magaluf with endless booze.
Pros – Money grows tax-free; simple to set up; anyone can contribute
Cons – Annual deposit limit; money locked away for 18 years; child has control when account matures
Children’s Savings Account
A children’s savings account works like a traditional savings account. You can deposit as much as you like in it (but, remember if parents place money in an account and it earns more than £100 interest it will be taxed at the parent’s rate), but the interest is subject to income tax.
However, children can earn up to £1,000 interest before they start paying tax thanks to the personal savings allowance. This means it is highly unlikely they will have to pay any tax on their savings interest.
The good thing with a children’s savings account is the money isn’t locked away for the long-term as it is with a JISA.
This means you can access the money if you need to, and also your child can save for things such as bike or game via their account and learn money lessons along the way.
The best rate available on a children’s savings account is 4.5% from Halifax for a 12-month bond.
You could also opt for a Children’s Regular Savings account. You’ll need to commit to save a small amount each month – typically £10-£100 – and slowly but surely you can build up a helpful pot of cash. The best rate is 4% from Saffron Building Society.
Pros – You can choose how and when the money is accessed; anyone can contribute; children can use their own account to save and withdraw money
Cons – Tax could be due; parents need to be careful how much money they pay in
Save in your own name
If you are worried about giving your child control over the money you are saving, then you could opt to keep the money in your own name but save it in a specific savings account that you plan to eventually give to them.
This means you retain complete control of the money but means you may also pay tax on it depending on your tax status. The other drawback to this is that, at the moment, you will get a worse interest rate than is offered on Children’s Savings Accounts and JISAs.
The best interest rate available at the moment for an adult savings account is 2.75% for a seven-year bond from PCF Bank.
Pros – Keep control of the money; choose when you hand it over to your child
Cons – May have to pay tax; Worse interest rate than other options.
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SIPP
The fourth option you could consider is putting money into a pension for your child. Even though your child isn’t earning any money they still benefit from tax relief on money paid into a pension. So, whatever you pay in the government will automatically add 20%.
The other big attraction of a SIPP is the sheer amount of time the money will have to grow. Your child won’t be able to access money until they are 55 – under current rules, but they could change over the next half century – which means the money has over 50 years to grow.
Assuming your child isn’t earning a wage the most you could pay into a SIPP is £3,600 a year – including the government top-up, so the maximum deposit is £2,880.
By putting money into a SIPP you’ll be get a serious head start on your child’s pension planning. But, you’ll also be locking that money away for a very, very long time. Your child won’t be able to access that cash to help them pay for university or buy a home.
Pros – Tax relief on pension contributions; money has a long, long time to grow; a big boost to your child’s retirement savings
Cons – Money is locked away for half your child’s life; Taking a gamble on future government pension policies.
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