Opening a savings account for your child is a great way to teach them about money, boost their financial education and give them their own pot to build on for the future.
Setting up your kids’ financial futures isn’t as easy and simple as when you were their age, and making mistakes could end up costing you and them.
We’re presented with lots of different saving options, and it can be overwhelming knowing which to choose, understanding the product and factoring in the various considerations that suit your own personal circumstance.
We’ve put together 8 top tips below, so you can help your child start saving and avoid any costly mistakes.
Choose the right structure
If you don’t know the options available to you, or you’re not clear on why you’re doing it, then it’s easy to get the wrong structure in place.
From high interest savings accounts, every day term deposits, pensions, ISAs and investment portfolios, what is it that you want and need?
The right structure for you and your children depends on a range of factors, including what the money will be used for, when it will and can be accessed, the tax impacts, control, risk and current interest rates.
Junior ISAs (JISA), Lifetime ISAs (LISA), pensions and cash are popular choices, but there are plenty of other beneficial options available, depending on your circumstances.
Read the detail
A quick google and application to the first ad you see could cost you.
Look at comparison sites to check out the different options – and read the finer print. In particular, pay attention to initial fees, ongoing costs, interest rates, how often interest is paid, hidden caps, conditions and restrictions, such as withdrawal amounts and contribution caps.
Plan ahead
Do you have a figure in mind that you’d like to pay into the account, and do you know how frequently you’ll be doing so? It also pays to think about the future, particularly how you would like your child to use the funds and when.
By outlining a plan, you’ll be able to work out exactly how much you can contribute.
Turning 18
When your child turns 18, the account could be legally theirs.
By considering what age you’d like your children to access the account, and what for, you can make an informed decision on the correct structure. It may be that the account is held in your name and their names to help control access.
There are tax factors to consider for every option, and these conditions generally need to be in place from the outset.
Keep inflation front of mind
Are you doing your children a disservice by saving in cash and not making your money work harder?
Generally, if the funds are for the longer term, you should take the opportunity to beat inflation by investing. These structures can have less accessibility, and performance is never guaranteed.
Tax still matters
Just because your child is under 18, doesn’t mean they escape paying taxes. In fact, tax is a crucial consideration here. Children have different tax rates to adults, and some key things to note include:
- Children have their own personal allowance of £12,750 (2024/25).
- If their income is from savings, there are extra tax free allowances in addition to the personal allowance, totalling £18,750 tax free in 2024/25.
- If the interest on the savings you put into your child’s savings account exceeds £100 a year before tax (or £200 if both parents give money), all of this interest (not just the amount over £100) will be added to your savings income, and taxed as if it were your own.
Keep a record
Keep a record of all your child’s new accounts and the details. Their existence could be forgotten over the years.
Values could be eroded by fees, taxes and inflation over the long term, or growth could be stunted by a lack of contributions and compounding.
Enjoy the education of money together
Understanding how the world of finance works is an important life skill for anyone, and teaching your children about money when they’re young can put them in a great position for later life. Make a point of reviewing your savings account and plans regularly, and enjoy watching their pot grow together.
At Cooper Parry Wealth, we help people save and plan for their future and their children’s every day. If you’ve got any questions, or you’d like some expert advice, don’t hesitate to get in touch.
Important
This communication is for general information only and is not intended to be individual advice. You are recommended to seek competent professional advice before taking any action.
Investment into any portfolio should be regarded as a long-term investment. Past performance can’t guarantee what investments will do in the future, and the value of a portfolio can go down as well as up, so there’s a chance you’d get back less than you put in.
This information represents our understanding of law and HM Revenue & Customs practice as at 05/09/2024 and may change if legislation changes.
Tax and estate planning advice are not regulated by the Financial Conduct Authority.
