Saving for children: a complete guide
Every parent wants to give their child the best possible start in life, and saving for their future is a key part of that. Whether it’s for university fees, a first home deposit, or simply to provide financial security, choosing the right savings and investment options is essential. In this guide, we’ll explore the different ways you can save for your child, where to hold the money, and how to make the most of tax-efficient options.
Why save for your child’s future
The cost of higher education, property deposits, and even general living expenses is rising. Planning ahead can ease financial pressure when they reach adulthood and help them start their independent life with a financial cushion. Here are some common reasons parents save for their children:
- University fees: Tuition and living costs can be significant, and having savings can reduce reliance on student loans.
- First home deposit: House prices continue to rise, making it harder for first-time buyers to get onto the property ladder.
- General financial security: Whether for a gap year, a car, or unexpected expenses, a financial safety net can be invaluable.
Choosing the right savings account
There are several types of savings accounts available for children, each with different tax benefits and accessibility rules. Below is a breakdown of each type, including its pros, cons, and when it may or may not be suitable.
Junior ISAs (JISAs)
What it is: A tax-free savings account for children under 18, available as a cash ISA (low risk, earns interest) or a stocks and shares ISA (higher risk, potential for greater returns).
Pros:
- Tax-free savings and investment growth.
- Encourages long-term savings as funds are locked in until the child turns 18.
- Higher potential returns with a stocks and shares JISA.
Cons:
- Money is inaccessible until the child reaches 18.
- Stocks and shares JISA carries investment risks.
Best for: Parents who want to build a long-term fund for their child without the temptation of early withdrawals.
Not ideal if: You may need access to the money before the child turns 18.
Children’s savings accounts
What it is: A standard savings account designed for children, often with better interest rates than adult accounts.
Pros:
- Usually offers better interest rates than adult accounts.
- Can provide instant or limited access, depending on the account type.
- Easy to set up and manage.
Cons:
- Interest earned may be subject to tax if paid by a parent and exceeds £100 per year.
- Returns are usually lower compared to investments.
Best for: Short-term savings or teaching children about managing money.
Not ideal if: You want a long-term, tax-efficient savings option with potential for growth.
Premium Bonds
What it is: A savings option provided by NS&I where money is entered into a monthly prize draw instead of earning interest.
Pros:
- Tax-free potential winnings.
- Money is government-backed, making it very safe.
- Can withdraw funds anytime.
Cons:
- No guaranteed returns—some savers may never win a prize.
- Inflation may reduce the real value of savings over time.
Best for: Those who want a secure place to save with a chance of winning tax-free prizes.
Not ideal if: You need guaranteed returns or regular interest payments.
Trust funds (bare trusts and discretionary trusts)
What it is: A legal arrangement where money is held on behalf of a child, either automatically becoming theirs at 18 (bare trust) or managed by trustees (discretionary trust).
Pros:
- Provides control over how and when money is accessed (discretionary trust).
- Can be useful for inheritance planning.
- Potential tax advantages depending on setup.
Cons:
- Can be complex to set up and manage.
- Bare trusts give the child full control at 18, which may not align with parental wishes.
Best for: Larger sums of money intended for long-term financial security or estate planning.
Not ideal if: You want a simple savings option or do not want to deal with legal complexities.
With so many savings and investment options available, choosing the right one can be challenging. Each has its own advantages and drawbacks depending on your financial situation and goals for your child. Seeking professional financial advice can help ensure you select the most suitable route, balancing accessibility, tax efficiency, and long-term growth potential.
Should you save in cash or invest?
The best choice depends on how long you have to save and your risk tolerance.
Saving in cash
- Best for shorter time frames (less than 5 years).
- Provides security and easy access to funds.
- Suitable for those who want certainty and no risk of losing money.
- May not keep up with inflation, meaning the real value of the money could decrease over time.
Investing in stocks and shares
- Suitable for long-term savings (5+ years), as investments have time to ride out market fluctuations.
- Offers the potential for higher growth compared to cash savings.
- Junior ISAs and investment accounts allow tax-efficient investing for children.
- Can be held in a parent’s or grandparent’s name for more control.
Whose name should the savings be in?
The ownership of the savings or investment can impact tax efficiency and control:
- Child’s name: Junior ISAs and children’s savings accounts are tax-free but give full control to the child at 18.
- Parent’s name: Allows parents to manage and decide when to release the money, but interest earned over £100 per year is taxed as the parent’s income.
- Grandparent’s name: A useful way to gift money while keeping control. Investments in the grandparent’s name avoid parental tax rules.
- Trusts: Allow control over how and when the money is used, making them useful for larger gifts or inheritance planning.
In summary
Saving for your child’s future is one of the most valuable financial steps you can take. Whether you choose cash savings, investments, or a combination of both, planning early can make a significant difference. By making use of tax-efficient options like Junior ISAs and considering how the savings are held, you can maximise the benefits for your child while maintaining control where necessary.
Next steps: At Chilvester, we specialise in helping families plan for their financial future. Our advisers in Newbury, Chippenham and Bristol can guide you through the best savings and investment options tailored to your needs. Get in touch with us today to arrange a consultation and start securing your child’s financial future.
