From the moment your little cherub enters the world, generous aunts and uncles are likely to shower them with gifts of money on special occasions.
It’s a good idea, then, to set up a savings account so your child can benefit from the interest as they get older. It’s also the perfect way to teach children about the value of money. Fortunately, there are a wealth of different savings, bonds and investments to choose from. Here are our top picks:
Most high street banks offer young savers accounts, so compare interest rates online first for the best deal. If you want the flexibility of withdrawing money, opt for an ‘easy access savings account’. The rates are lower than a ‘regular savings account’, but you won’t be penalised for taking out cash. If your child has a long-term saving goal, open a regular savings account - interest rates can be as high as 4%. Remember this type of account is taxable if the child receives over £100 in interest a year from money given by a parent (unless it’s above the parent’s Personal Savings Allowance). However, grandparents, other relatives and friends can give as much as they like!
A great saving option for kids is a tax-free Junior ISA. Yes, that’s right -no tax! In the 2017-2018 tax year the savings limit for this account is £4,128. There are two types of Junior ISA: cash or stocks and shares. With a Junior Cash ISA, you simply save money tax-free. With a Stocks and Shares Junior ISA, your money is invested and any dividends you receive are tax-free. Parents manage these accounts until their kids turn 16, with withdrawals possible from age 18.
Important point: if your little one has a child trust fund, they can’t have a Junior ISA too. To open a Junior ISA account, you have to transfer the trust fund into it.
If you fancy putting your child’s cash into a fixed-rate savings account, then a bond is for you. The up-side is a good, stable interest rate for a fixed term – normally one to five years – but the down side is withdrawals aren’t allowed. A good choice is the NS&I Children’s Bond, which at the moment yields 2% annual interest for five years and is completely tax-free. Open the account with just £25 up to a maximum investment of £3000.
A fun and potentially fruitful gift for your child is premium bonds. Parents, grandparents or legal guardians can buy premium bonds on behalf of a child under 16 and invest any sum between £100 and £50,000. It’s a little like the lottery: there’s no interest gained but your child’s bonds enter a monthly draw to win tax-free cash prizes which range from £25 to a whopping £1million. Yes it’s a risk but makes a lovely present and could pay off big time!
OK, it sounds a bit weird taking a pension out for your one-year-old, but this could be the wisest move you ever make. Virginmoney.com reveals that saving £50 a month into a pension from age five adds an extra £88,000 by age 67, as opposed to saving from age 18. With a Sipp you can invest up to £2,880 per child per year and the government adds a further 25%, which turns £2,880 into £3,600. When your little one turns 18, control of the pension is handed over to them and they pay into the scheme from then on. They can withdraw their pension at age 55.
It’s a no-brainer.
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