Children’s savings accounts: the basics
Junior ISAs are simple and tax free and any child resident in the UK who is not eligible for a Child Trust Fund (CTF – see below) can have up to one Junior Cash ISA and one Junior Stocks & Shares ISA.
Any child born before September 2003 and on or after after 3rd January 2011 is eligible. Up to £3,600 can be invested in a child’s JISA(s) in total every year.
Parents, grandparents, anyone with an interest in a child’s financial future can contribute to either account provided the total annual limit is not exceeded.
And the beauty is that there is no additional paper work. Tax forms do not need to be filled in for the child and the tax office does not need to be informed that a Junior ISA has been started.
And for those who do have CTFs, while the Government will no longer be making a contribution, they will function in the same way, albeit remaining separate.
At 16, the child assumes responsibility for the account, meaning that if they wish to transfer from one manager to another, it is within their power; and when the child reaches adulthood at 18, by default, the JISA turns into an ISA.
Child Trust Funds
Child Trust Funds (CTFs) were introduced on 1st September 2002. All children born in the UK between that date and 1st July 2010 received a £250 cheque from the Government to kick start their savings and investment account.
The hope was that having a CTF would encourage children and their families to develop a savings habit.
The current government reduced the size of the cheque to £50 for children born between 1st July 2010 and 30th December 2010, and CTFs were then scrapped.
For those with existing CTFs, friends and family can top it up with up to a maximum of £1,200 each year and the funds in the account are exempt from income tax and capital gains tax, including at maturity.
The funds are held in trust for the child until they turn 18, after which the money is theirs to use as they wish.
They will also have the option of converting the CTF into a cash or Stocks & Shares Individual Savings Account (ISA), maintaining the tax benefits until they need to access their savings.
The CTF is managed by the parents/legal guardians of the child until the age of 16. After that point, the child can take over management of the CTF but still won’t be able to withdraw money from the account until reaching 18.
Alternative savings/investments for kids
If your child or grandchild doesn’t qualify for a Child Trust Fund or Junior ISA, there are a number of alternative savings options: Savings accounts The first is to open a traditional building society savings account, which is the most popular option among parents and children. A savings account is an ideal way to get children into the savings habit because its straightforward nature means that they can learn how to deposit cash, see their savings build and earn interest. Most building societies or banks offer special children’s savings accounts
If you are able to put a lump sum of money aside for your child for a fixed period of time, an alternative to the traditional savings account could be a Fixed Rate Bond. A bond is a particularly attractive option for those people who are looking for a higher rate of interest and want to be safe in the knowledge that the rate will remain guaranteed for a fixed period of time. Some banks and building societies allow children to open bonds from the age of seven. Alternatively parents or grandparents can open a bond in trust for a child under seven years old.
Individual Savings Accounts (ISAs)
Cash ISAs are another option, which give older children the chance to start saving in a flexible, tax-efficient way. A child can open a cash ISA once they reach 16 and a stocks and shares ISA once they are 18. Young people considering a stocks and shares ISA need to be aware that the stock markets can go up and down and that this is a long-term investment.
Another long-term savings option may be an Investment Fund but you must be over 18 to apply. Parents and grandparents can help build a tailored portfolio which could be held in trust for the child with no limit to the amount that can be invested in this way.
Setting up a Stakeholder pension for a child may sound extreme to many parents as the child will not be able to access the fund until they are aged 55, but it is a great way to save for the long term as the earlier you start paying into a pension, potentially the more money your child gets in retirement. A key advantage of a Stakeholder pension is that the child will also receive tax relief, even though they probably don’t pay income tax. This means that a payment of £240 a month will be topped up to £300 with tax relief (assuming a basic rate of income tax).
5 steps to encourage kids to save
- Choose an account that is easy to open and operate
- Teach kids to set savings goals from a young age eg, saving their pocket money to buy a new toy they want
- Help them work out a budget by looking at how much they can ‘earn’ each week compared to what they spend
- Encourage them by matching what they save
- Encourage family members to contribute to their savings accounts rather than buying them presents.