Saving money for your children is hard enough without having to trawl through never-ending research on the best way to save. But there are some simple questions you can ask yourself to help identify the best child savings accounts to suit your needs.
Children are expensive. According to the Insurance giant LV=, the average cost of raising your child to age 21 is £218,024 broken down as follows:
- Childcare & Babysitting £62,099
- Education £71,780
- Food £18,667
- Clothing £10,781
- Holidays £15,532
- Hobbies & Toys £9,248
- Leisure & Recreation £7,303
- Pocket Money £4,337
- Furniture £3,373
- Personal £1,143
- Other £13,761
While much of this cost is in the early years, there is time to plan for education, gap years, weddings and a thousand incidentals – and make sure you select the best child savings accounts for your investments.
Where do you begin?
There are so many different ways of saving money for your children – once you start to research, you can tie yourself in knots trying to find the best solution, and often end up doing nothing.
Save or invest?
Do you want to save money for your children? Or do you want to invest money for your children?
This is the first thing to establish when trying to find the best child savings accounts for your needs – and the difference is in the ‘risk’. If you use Cash Deposit type vehicles, then your money is free from investment risk. The returns may not be very exciting, but you do not have to worry about the value of your savings going down.
Here are some possibilities, and their pros and cons.
1. Children’s Bank or Building Society Account
Many banks offer children’s accounts:
- Your child can earn interest of up to £8,105 this tax year (the personal allowance) without paying any tax – you will need to fill out an R85 form
- However, if the funds have come from a parent any interest over £100 will need to be declared by the parent, and will incur tax. So, these accounts are best suited from income that the child has earned, or gifts from grandparents, aunt, uncles and friends.
2. National Savings & Investments (NS&I) Children’s Bonus Bonds
- You can invest up to £3,000 per child, with no tax liability whatsoever
- Fixed term of five years. You can withdraw the money early, but would earn no interest if you cashed it in in the first year
- The current issue is offering 2.5% AER plus a bonus in the fifth year
- Your money is completely safe, as NS&I products are backed by HM Treasury
3. Cash Junior ISAs (JISAs)
- You can invest up to £3,600 per tax year in a Junior ISA
- Rates will vary between different JISA providers
- Interest is free of tax
- The money is not accessible until the child is 18….
- At which point the funds are completely under the child’s control
Are you saving money for your children or yourself?
It is important to establish whether you are saving money to spend on your children, or whether you are saving money to give to your children at say age 18. If it is the latter, and you are happy to completely relinquish control of the money, you should seriously consider a JISA – you can currently get rates of up to 3.25%.
Investing money for your children
If you invest money for your children in an ‘equity based’ investment, there is the possibility of achieving much higher growth rates over the long term, than the above deposit-based accounts. There is no guarantee that the return will be greater, and the value of your investment can go down as well as up. However, as long as you are aware of this, this can be an excellent way of building up long-term funds.
If you wish to have control over the funds, you could look at:
- Investing in the Stock Market through a fund ‘designated’ in your child’s name. This means that you have the option to sign it over to them when they reach 18.
- Some companies have products specifically designed for this, for example, Invesco Perpetual Children’s Fund, which allows you to pay a regular amount per month, or add small lump sums on an ad hoc basis (useful for birthdays and Christmas)
As above, if you are happy for your child to have full control at age 18, your best bet is:
- Stocks & Shares JISA
- You can invest a maximum of £3,600 per tax year (less whatever you have saved in a Cash JISA) that year.
- There are so many different providers of Stocks & Shares JISAs. If you are unsure of which to choose, and you do not have access to a financial adviser, you could start with a ‘managed fund’.
Most importantly when selelcting the best child savings accounts for your needs, choose a plan which is flexible – it is important to be able to adjust the payments as your circumstances change.
Henrietta Oxlade is an Independent Financial Planner with Radcliffe & Newlands and MyFamilyClub’s in-house finance sage! She has been advising individual clients since March 1988, which is why many of her clients consider her part of the family. If you want to contact Henrietta, email us on [email protected] and we’ll put you in touch.