10 things you need to know about children's savings
Deciding what to do with your children's savings can seem a huge responsibility. Most of us want to ensure their money is working as hard as possible in order to provide them with maximum returns in the future, but it isn't always easy working out the best options, or knowing which tax rules apply.
Here, we explain 10 things everyone should know about saving for children to help them get the most from their money...
1. Children have their own personal allowance
Children, like adults aged under 65, have a Personal Allowance of £9,440 for the tax year 2013-14. This is income they can receive tax-free. 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.
2. You need to register to ensure your children's interest is tax-free
To register to get interest on your children's savings tax-free, you need to fill in the HMRC form R85 and send it to your bank or building society.
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 children have accounts. You should be able to get an R85 from the institution you're opening an account with.
Alternatively, you can download a form from the Revenue's website.
3. Watch out for the £100 rule
If money is given to a child by a parent and earns gross interest of more than £100 a year, it is taxed as the parent's own income. At today's interest rates, a parent would fall foul of the rule on savings of about £3,000 to £4,000.
But remember that each parent can give money to a child, so they could potentially earn interest of £200 without having to worry too much about tax. The rule does not apply to grandparents or other friends and relatives.
4. Parents, friends and relatives can pay up to £3,720 per child into a Junior ISA each tax year
Any child born on or after 3 January 2011 and children born before 1 September 2002 is eligible for a tax-free Junior ISA. For the 2013/14 tax year you can invest up to £3,720 and returns are totally tax-free, even if the money is invested by the parent.
As with ISAs for adults, you can choose between a stocks and shares ISA or cash ISA, or split your child's allowance between the two.
If you can afford to pay in the maximum permitted into a Junior ISA each year, your child could end up with a significant nest egg at the age of 18. For example, a parent maximising their Junior ISA allowance each year could earn up to an estimated £86,000 over an 18-year period, assuming interest at 3%. Even investing just half the limit could result in a nest egg of an estimated £43,000.
5. You can't transfer savings held in a child trust fund into a Junior ISA
Children born between 1 September 2002 and 2 January 2011 will have a Child Trust Fund (CTF), rather than a Junior ISA.
As the rules currently stand, you cannot switch from a CTF to a Junior ISA. This is bad news for parents and children as there is little incentive for banks and building societies to continue paying competitive rates of interest on cash CTFs as they are no longer trying to attract new business.
However, while you can't move from a CTF to a Junior ISA, you can transfer your child's savings to another CTF account if you are disappointed with the return. Also, the amount you and other family members or friends can contribute has increased so it is in line with the Junior ISA. You can invest up to £3,720 each tax year (the limit used to be £1,200).
And remember, if your child does have a CTF, he or she received a voucher from the government. Children with Junior ISAs have not had any contribution from the state.
6. Children can do whatever they want with Junior ISA and CTF cash at the age of 18
Money paid into a Junior ISA or CTF is locked away until your child reaches the age of 18, but at that point they are free to spend it on whatever they want. So while you might have earmarked for their university education or a deposit on a property, they might choose to blow it all on a car or travelling round the world.
If you want more control over their savings, then you may be better off using your own ISA allowance for your children - that way the cash will be in your name and you can decide where it will be spent.
7. Over-16s can put £5,760 into a cash ISA
As well as having a Junior ISA, children aged 16 or over can also have an adult cash ISA, into which they can invest £5,760 this tax year.
They can't invest in a stocks and shares adult ISA until they're 18.
8. Regular savings accounts usually pay the top rates
Outside of ISAs, the highest rates of interest on children's savings accounts usually go to those who commit to saving regularly. You can earn up to 6% with some accounts provided you pay in between £10 to £100 a month - not bad when you consider that the Bank of England base rate is still stuck at 0.5%.
However, there are more restrictions with these accounts. You must commit to saving each and every month, normally for one year. There is also a limit on the amount you can put into the account, usually about £250 a month.
9. It's good to teach children about the value of money
As well as saving for your child's long-term future, many parents also want an account into which birthday, Christmas and perhaps pocket money can be paid but then withdrawn for special purchases or school trips. This is a great way of helping to teach your son or daughter about the value of money – if there's something they really want; they can save up for it.
A regular savings account probably isn't the best option for this purpose as money has to be paid in every month and can't be accessed during the term. Instead, an easy access account will be a better bet. With this type of account, money can be paid in or taken out at any time.
Most banks and building societies offer easy access accounts for children and the leading rates are currently around 3.00%.
10. You can save into a pension for your child
Making regular contributions to a child or grandchild's pension may seem odd, but could give them a real helping hand later on in life.
You can pay in up to £2,880 into a pension for your child each year. Thanks to tax relief on pensions, this is then topped up by the government to £3,600.
Figures from Self-invested personal pension (Sipp) provider Alliance Trust Savings indicate that a monthly contribution of £83 would be enough to ensure a pension fund of more than £1 million in 60-odd years - as long as the child continues contributing in adulthood.
Last updated: 10 months ago