How to save for your children

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mother and daughter

mother and daughterIn an ideal world, most parents would have some money set aside to help their children out financially as they spread their wings and embark on adulthood.

And the good news is that even a small amount can grow into a sizable fund over time, especially if you invest regularly.

Here’s a simple guide to the various options for parents who want to save for their children.

Junior ISAs

Like Individual Savings Accounts (ISAs), tax-efficient Junior ISAs can be used to invest in cash or stocks and shares.

You can split your contributions between the two should you wish, although only one Cash and one Stocks and Shares Junior ISA can be held per child.

Consequently, you could choose to put £1,000 of the maximum that can be paid in this tax year – £3,600 – into a cash-based savings account and the other £2,600 into an investment fund.

As with adult ISAs, the advantages include no income tax on savings and no capital gains tax or tax on dividend income for those who choose the investment version.

Child Trust Funds (CTFs)

CTFs, which also come in cash and investment versions, have now been scrapped to make way for Junior ISAs (with which they may well be merged at some point).

However, if your child did qualify for CTF vouchers from the government in the past, you can continue to save into one.

The maximum contribution possible this tax year is £3,600.

Savings accounts

Many banks and building societies provide savings accounts for children.

The interest rates vary significantly, though, so it is worth shopping around, whether you want a fixed-rate, easy-access or regular saver account.

The lack of tax advantages means they should only be considered once you have exhausted your child’s Junior ISA/CTF allowance.

Bonus bonds

Children’s bonus bonds are offered by National Savings & Investments (NS&I), and are therefore government backed.

Each bond lasts for five years and pays a fixed rate of tax-free interest, plus an additional bonus at the end of the term.

However, they are only open to those savings for children under 16.

Premium bonds

Premium bonds are also provided by NS&I and are often bought for children.

They offer the potential of a big win as well as smaller prizes, but they do not pay any interest.

If you are unlucky, you may not see any return on your investment as a result.

Investment funds

There are thousands of investment funds, such as unit trusts and investment trusts, available.

Through them, you can invest in a wide range of assets, including stocks and shares, property and corporate bonds, for your child.

As with savings accounts, however, the lack of tax advantages means that only money you cannot put into a Stocks and Shares Junior ISA should be invested outside an ISA wrapper.

Pensions

Setting up pensions for your children may sound extreme, but it could be an excellent way to save for the long term.

The advantages include generous tax breaks and that the fund will have a long time to grow.