Introduction to Saving for Children
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.
Mr & Mrs Proud save £80 a month (into a cash ISA paying
1.00% annual interest) over the five years before their daughter, Fifi, is born. On
that happy day the savings would be worth
£4,923, 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 £24.00 per week for your first child and £15.90 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you'll need to claim for it, and if one parent (or both) has an annual income exceeding £50,000 the benefit will be withdrawn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.
The child tax credit (CTC) is payable to parents (age 16 and over) regardless of whether they work, provided their combined income does not exceed £65,000.
It comprises 'family' and 'child' elements.
The full 'family element' of £545 a year is paid to parents with a combined income of £40,000
or less (reduced thereafter). It is doubled during the tax year of birth.
The 'child element' of up to £2,780 a year is paid per child. To receive the full amount parents combined income must be no more
than £16,105 a year. When income exceeds this the payments reduce quite sharply.
The CTC is paid direct into bank accounts weekly.
Although not just restricted to those with children, the working tax credit (WTC) includes provision to pay towards childcare costs.
Parents could receive up to 70% of eligible childcare costs totalling £123 per week for
one child or £210 per week for two or more children, dependent on their income.
To claim this both parents (or a single parent) must work at least 16 hours a week and the childcare must meet HMRC's qualifying criteria.
Calculating how much you might receive can be a bit of a minefield, so HMRC's Tax Credit
Calculator is well worth a try. However, as a rule of thumb if your combined income is over £25,000 - £35,000 a year (depending on number of children) you'll
probably just receive the basic 'family' element.
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 |
| Junior ISA (JISA) |
18 |
| Shares, Unit/Investment Trust |
18 (16 in Scotland)* |
| Stakeholder Pension |
55 |
| * 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:
- Hold the savings/investments yourself then give them to the child when you're comfortable.
- 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 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.
You gift the money into a simple trust for the child, so it is no longer yours. One or more 'bare trustees' (e.g. you and other family member) are then responsible
for how the money is saved/invested until the child reaches 18. To set up a bare trust you just need to complete a 'declaration of trust' form (usually supplied by the
investment provider) and inform HMRC in writing.
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:
| £100 Rule | If 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 Trust | A 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 School | A school where pupils reside for the whole term, only going home during holidays. |
| Bursaries | Means tested financial assistance given to some pupils at private schools. |
| Day School | A school where pupils attend for the day then go home afterwards. |
| Designated Account | An investment that is owned by an adult but intended to pass to a child when they reach 18. |
| Savings Account CTF | A child trust fund that invests in a conventional type savings account. |
| Scholarship | Financial 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 CTF | A child trust fund that has a cap on annual charges and rules on how the money is invested. |
| Stocks & Shares CTF | A child trust that invests in stock markets, either individual shares or investment funds. |
| Top-Up Payments | Annual child trust fund contributions that may be made in addition to the standard voucher. |
| Voucher | A 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. |