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Introduction to Saving for Children

Candid Comment
Junior ISAs
29 October 2010
Junior ISAs worthwhile?
31 March 2011
University fees controversy
13 October 2010
Child benefit changes
04 October 2010

Saving for children really covers two areas:

  • Saving money yourself in an attempt to help cope with the costs of raising a child in future.
  • Putting some money away on behalf of a child to help them later in life.

In many ways saving and/or investing for children is not that different to saving/investing for adults, but there can be differences concerning tax, products on offer and what you want the money to achieve.


How much does it cost to raise a child?

Usually, a lot! I reckon that bringing up a child could have cost you anywhere between £40,000 and £400,000 by the time they're financially independent.

The most common costs are food, clothing, hobbies/toys, holidays, pocket money, childcare, school/university fees and cars. Spending on these obviously varies widely between families, but even the most frugal of parents will likely still see the arrival of a child noticeably dent their finances.

Estimate how much it could cost to raise your child using our Kiddie Cost Calculator.


What can I do to prepare my finances in advance?

Save, save and save. There's no magical formula, but saving as much as you can afford for as long as possible before the child is born will undoubtedly help.

Candid Example Mr & Mrs Proud save £80 a month (into a cash ISA paying 1.40% annual interest) over the five years before their daughter, Fifi, is born. On that happy day the savings would be worth £4,974, a useful sum to help cope with the costs of raising her.

Being realistic, it's very unlikely you'll be able to save anywhere near enough to fully fund the cost of your child before it's born, especially if you intend to send him/her to a fee paying school. In practice you'll need to use whatever savings you can muster along with your earnings, cutting back what you spend in other areas if necessary.


Does the government help?

Yes, there are several benefits available. While they may not fully cover the costs of raising a child, they'll certainly help:

Child BenefitChild Tax CreditWorking Tax Credit

A tax-free payment of £20.30 per week for your first child and £13.40 per week for subsequent children.

It is available for children under 16. However, it's not automatic, you'll need to claim for it, and if one parent (or both) has an annual income exceeding £50,000 the benefit will be withdrawn at a rate of 1% for every £100 earned over £50,000. The money is usually paid every four weeks straight into your bank account.


Pocket money

Want to know today's equivalent for the pocket money you received as a kid? Use our Pocket Money Comparison Calculator to find out whether the pocket money you're paying your child makes them better or worse off than you were at their age!


Saving & investing for your child's future

Most of the options open to adults, e.g. shares, unit/investment trusts and savings accounts are also available for children. Savings accounts can be owned directly by the child while shares and unit/investment trusts can held held by an adult or trust for the child's benefit.

You can, of course, simply save/invest yourself with a view to passing it to the child in future. This gives most flexibility but may not always be tax efficient and runs the risk that you change your mind and spend the money on yourself!

The key is to ensure you're happy with the risk and timescales of the route you take. Cash is a good option if you're cautious and/or only looking to tie up the money for a few years or less. Other, more exciting, investments can be worthwhile if your time horizon is longer and you can stomach some risk.


Could my child squander the money?

The biggest dilemma many parents and grandparents face is wanting to give a child some money for the future, but worrying the child will squander it before coming of age.

The usual situation for popular options is as follows:

When a child can get their hands on the money
Saving / Investment Type Age when a child can access the money themselves
Savings Account Varies, but generally 11 - 16
Child Trust Fund (CTF) 18
Shares, Unit/Investment Trust 18 (16 in Scotland)*
Stakeholder Pension 55 (from April 2010)
* when held in a designated account or bare trust

Because children can't practically own shares or unit/investment trusts until they're 18 (16 in Scotland), they'll need to be owned meanwhile by an adult or trust for the child's benefit. This is usually via a 'designated account' or 'bare trust'. In both cases, the child cannot touch the investment until it passes to them at age 18 (16 in Scotland), so this does give some degree of protection.

If you really don't want the child to get their hands on the money beyond age 18 you have two options:

  1. Hold the savings/investments yourself then give them to the child when you're comfortable.
  2. Place the savings/investments into a trust (not 'bare') that specifies the age at which the child gets the money (e.g. 25). This will need to be done via a solicitor and could cost a few hundred pounds to set up.

Who pays tax?

This depends on how the money is held. Obviously, if you hold savings or investments yourself then you are taxable.

If held by the child then they are liable to both income and capital gains tax, just like an adult (children get the same tax allowances). However, if parents give money to their child (e.g. put money into the child's savings account) then income will be taxed as the parent's if it exceeds £100 (per parent) a year. This doesn't apply to gifts made by others, e.g. grandparents.


Designated account vs bare trust

Designated AccountBare Trust

The money remains yours but is designated (i.e. intended) for the child. You usually do this by entering the child's name or initials in the 'designation' section of an application form.

You can then choose for the investment to be passed to the child once they reach 18, usually without charge.

While both can achieve a similar result there are differences, as follows:

Comparison of designated accounts and bare trusts
Designated Account Bare Trust
Who owns it? You. There is the option to transfer the account to the child when they reach age 18. The money is held in trust for the child. You have no rights to the shares, as the Trustees retain legal control until the child reaches 18 - at which point the shares are automatically transferred into the child’s name.
Withdrawals allowed? Yes. Yes, provided they're for the child's benefit.
Income Tax You're liable for income tax until the investment is passed to the child. If income is above £100 a year and the money was given by a parent then all income is taxed as theirs, else taxed as the child's.
Capital Gains Tax You're liable for capital gains tax until the investment is passed to the child. Treated as a gain of the child.
Inheritance Tax Not treated as a gift and remains in your estate. Treated as a gift so subject to normal inheritance tax (IHT) rules.

Kid's Financial Jargon

Here's some of the more common kid's financial jargon you might come across:

JargonMeaning
£100 RuleIf a parent gives their child money (which is saved or invested) and the annual income exceeds £100, it's taxed as the parent's.
Bare TrustA simple trust that allows investments to be held for the benefit of a child until they reach 18. Someone else (trustees) takes responsibility until then.
Boarding SchoolA school where pupils reside for the whole term, only going home during holidays.
BursariesMeans tested financial assistance given to some pupils at private schools.
Day SchoolA school where pupils attend for the day then go home afterwards.
Designated AccountAn investment that is owned by an adult but intended to pass to a child when they reach 18.
Savings Account CTFA child trust fund that invests in a conventional type savings account.
ScholarshipFinancial assistance given to some pupils at privatre schools who demonstrate either excellent all round academic promise or special abilities in the arts, sport or technology.
Stakeholder CTFA child trust fund that has a cap on annual charges and rules on how the money is invested.
Stocks & Shares CTFA child trust that invests in stock markets, either individual shares or investment funds.
Top-Up PaymentsAnnual child trust fund contributions that may be made in addition to the standard voucher.
VoucherA voucher given to children born on or after 1 September 2002 to start their child trust fund. Initially at birth and again at age 7.