How can I save for my child’s future?

How can I save for my child’s future?

If you are like most parents, you’ll want the best things in life for your child.

Yet, with so many options and opinions out there, knowing how to save for your child’s future can be challenging.

That’s why we have put together this quick, easy overview covering the pros and cons of the most common ways to save. That way you can decide what’s best for you.

Let’s take a look.

Bank and building society accounts

It’s no surprise that many parents opt to open a bank or building society account for their child. It’s the most common type of saving vehicle people have and one that most of us can get to grips with easily.

Yet, putting your money into one of these might not help it to grow as much as other saving vehicles available to you. With the uncertain days of Brexit lurking around the corner, interest rates are likely to be relatively low at least for the foreseeable future.

On the other hand, it won’t hurt to shop around. Some accounts offer up to 4.5% interest for the first year, as long as you’re contributing between £10 and £100 every month.¹

ISAs

Are you looking for something that will help your money grow more than a bank account, but still want the option for your child to access it? Then an ISA could be the best option.   

Although some ISAs do have restrictions to prevent withdrawals for a set period of time, the good news is they come with the perks of tax-free interest and tax-free withdrawals. For the 2018/19 financial year, your child’s tax-free allowance is £4,260.*²

Like bank and building society accounts, there are a few types of ISAs to choose from.

Junior ISAs

As your child grows you can continue topping up contributions when you want to and it will be a great gift into adulthood on their 18th birthday. There are two types of Junior ISA:

  • A Junior Cash ISA will offer slightly better interest rates than an everyday bank or building society account but the big deal is that the interest is tax free, unlike your bank account.
  • A Junior Stocks and Shares ISA which is a little riskier as investments can go up or down, yet overall profits over the long -term are likely to be higher than the Cash ISA.

Maybe you’re thinking even further ahead and want to help them get onto the property ladder? If so, a Lifetime ISA or a Help to Buy ISA could be the way forward.

Lifetime ISA (or LISA)

What would LISA know about saving? Quite a bit actually, but it’s not the LISA that you might be thinking of…

The Lifetime ISA was introduced last April, (2017) by the government to encourage people between the ages of 18 and 39 to save for a home. It offers savers the chance to receive a 25% government bonus on their contributions, which is not to be sniffed at. You can help your child open their own account and receive tax relief on contributions of up to £4,000 per year.* ³

It can also be used as a retirement nest egg if it’s not used to buy a home. But, it’s unlikely to perform as well as a pension. Depending on your earnings, you can contribute up to £40,000 per year into a pension, inclusive of tax relief and any other contributions made, such as ones from your employer.* But, in a LISA you can only contribute up to £4,000 tax-free per annum.

This is also reflected in both pension and LISA lifetime contribution limits. A LISA has a much smaller limit of £128,000, whilst a pension has a limit of £1 million.

And, pensions can be invested in funds which are more likely to provide a higher return than banks providing an ISA. Also, savings from a LISA cannot be released until your child reaches 60 without incurring a charge.

Help to Buy ISA

With rising house prices, many young people are finding it difficult to buy their own homes. So, this type of ISA is a great way of helping your child step onto the property ladder and turning their dream of owning their first home into a reality. They would need to open this ISA in their own name and they can do this from the age of 16.

With Help to Buy, they can receive a bonus of up to £3,000 towards the deposit. Contributions need to be £1,600 before they can claim the minimum government bonus of £400.⁴

Pensions

What would your child say if you told them that you were saving for their future by putting money in a pension for them? Would you be confronted by a face full of confusion? Perhaps a barrage of questions? Or maybe both?

It may feel a long way off and not as exciting to a child as a lump sum of money in the short term, yet the rewards from starting your child’s pension early are hard to ignore. The children’s pension offers tax relief on contributions and any growth on the lump sum is not taxed either. Plus, it also provides all the normal benefits and features you would expect from a personal pension.

The children’s pension allows you to contribute up to £3,600 per year inclusive of tax relief.

What’s the best option for you?

It really depends on your circumstances now and in the future.

The rule of thumb is, if you can, have a mix of saving solutions for your child.

You’ll have instant access to money with a bank account when your child needs it and with an ISA, a better chance to see some investment return without most of their savings tied up for the majority of their adult life.

And of course, a pension will give them the security in their later years when they say goodbye to the nine to five.

How realistic does this type of saving sound, especially in the current economic climate? The good news is regular contributions now, however small, could make a bigger difference than you might think. Particularly with something like a pension, where the tax breaks and compound interest could supercharge your child’s savings.

Plus, giving your child that future head start could be getting them into good financial habits that they will take into adulthood.

Our latest research shows just how much of a role model parents are for their children when it comes to money.

Find out more here.

 

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Important Information

*Tax treatment depends on your individual circumstances and may be subject to change.

¹Halifax UK, (online) – Kids’ Regular Saver, 19th February 2018

²UK Budget.com (online) - Deloitte UK Tax Rates 2018/19, page 3, Autumn Budget, November 2017

³HM Government (online) – Lifetime ISA, 23rd February 2018

⁴ HM Government (online) – Who is eligible? Help to Buy, 23rd February 2018.

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The details provided in this article are for general information only and are in no way deemed to be financial advice. All of the material is correct as of the publication date, but could be out-of-date by the time you read the article. For our latest information and news, please see our articles section here.

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