Saving for your children
Encourage your children to start saving when they are young, and you'll be teaching them one of the most valuable money lessons they'll ever learn.
Most children's first experience with money is in the form of a Christmas or birthday present. Rather than letting them head straight to the shops, try to encourage them to save a pound or two each time.
Setting a savings goal is one of the best ways to encourage children to do this, so get them to think about what they'd like to put their money towards, and work out how long it might take them to achieve this target.
Explain to them that by putting money away in a savings account each month, they'll earn interest on their cash, which will help them reach their goal more quickly.
Many children's accounts come with passbooks, so you can show them exactly how their money is growing over time.
Which children's account?
Plenty of accounts come with tempting freebies such as money boxes or wall charts, but remember that the interest rate is much more important than any of these.
Many children's accounts offer easy access, but often the highest rates are to be found on regular savings accounts, which require a monthly commitment, usually £10 to £25, up to £100 or sometimes £250.
If you don't want to have to pay in a set amount each month, then several easy-access accounts can be opened with just £1 or more. However, always make sure you compare a range of different accounts, as interest rates can vary widely.
Longer term savings
If you want to save for your child's future and don't want them to be able to access this money before the age of 18, then a child trust fund or junior individual savings account (ISA) is likely to be your best bet.
Whether you can pay into a child trust fund or Junior ISA depends on when your child was born. Children born between September 1 2002 and January 2011 are eligible for child trust funds, while children born outside these dates are eligible for Junior ISAs.
Each tax year you can invest a certain amount into a Junior ISA or CTF. The allowance for the current tax year which runs from April 6 2013 to April 5 2014 is £3,720. This can either be invested in cash, stocks and shares, or a combination of the two.
However, whereas Junior ISA investors have a choice of thousands of different investment funds and cash accounts, the options for those with child trust funds are much more limited. It is not currently possible to move funds from a CTF into a Junior ISA, although this is something the government is looking into on the back of pressure that those with CTFs are at a disadvantage because the products are no longer open to new business.
Bear in mind, however, that any money paid into either a CTF or Junior ISA will be held in your child's name, so it will be entirely up to them how they decide to spend the money once they reach the age of 18.
Tax implications of saving for children
You can give your children as much money as you want to. However, if you are a parent or step parent and the money you give your child earns more than £100 interest a year, the interest will be taxed as if it is your own.
This doesn't apply to friends, relatives and grandparents, who can give the child as much as they like and returns will be tax-free, provided the interest earned does not exceed the child's personal allowance.
Children, like adults have personal allowance and it is £9,440 for the 2013-2014 tax year. As long as their annual income (including interest) is below this amount, they'll be able to receive interest without having the tax deducted or can claim back any tax they shouldn't have paid.
In order to ensure interest on your children's savings is paid tax-free, you will need to fill in the HMRC form R85 and send it off to your bank or building society. Usually the bank you are opening an account with will supply you with this form. Some banks and building societies also let you register by phone. You'll have to fill in a separate form R85 for each bank or building society where your child has an account.
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Disclaimer: Any content in our family money section is intended as general information only. For specific advice about your personal financial situation, get advice from qualified, independent, regulated professionals.
Last updated: over 1 year ago