Saving and investing for children, can be an important part of a well-rounded financial plan. It is possible to improve your own tax efficiency whilst providing a tax efficient savings pot for your children’s and grandchildren’s future.

Whether you’re looking to start a savings account for your child, or to identify the best way to save for your grandchildren, setting aside money for children not only provides a sum of money for when they are older, but also provides an opportunity to teach them more about the commodity we as people need, to provide specific options in life.

A big question we are asked as financial advisers is – How should I invest for my children?

In this article we look to answer that very question by providing information on the many options available to you, including helping you to understand the tax allowances of specific products available.

Before you decide a way to save for your children or grandchildren, please understand this article does not constitute financial advice, which option you should choose will depend on several things including – who you are looking to save for, why you are saving for them and the size of the funds you are looking to save.

We highly recommend you speak to a regulated financial adviser who will help you make the best choice for you and those you are looking to save/invest for.

Junior ISAs

Saving and investing for your child’s future can begin through a Junior ISA.

A parent or legal guardian can open a Junior ISA for any child under 18 years old. Just like a normal ISA for the over 18’s, there are Junior Cash ISAs and Junior Stocks and Shares ISAs available.

The yearly ISA allowances for Junior ISAs are different from adult ISAs though, in 2022/23 the Junior ISA allowance is £9,000. If you want to save more cash than this, you’ll have to look for alternatives, a financial adviser can help you here.

Anyone can add money to your child’s Junior ISA – for example grandparents, friends, and relatives.

If your child is 16 or older, they can have a Junior ISA in addition to a Cash ISA – meaning their total ISA allowance could be £29,000 in the 2022/23 tax year.

When your child turns 18, their Junior ISA becomes a regular, adult, ISA and they can save and invest themselves.

Only the child can withdraw the money in their Junior ISA, and only from their 18th birthday.

Cash Junior ISAs are effectively a bank account and so would grow by earning interest.  Stocks and Shares Junior ISAs will be invested in will produce returns in line with the underlying investments within the ISA.  Stocks and Shares carry greater risks than cash but can provide greater returns over the long term.

Child Trust Funds (CTFs)

A Child Trust Fund (CTF) is a tax-free savings account, similar to a Junior Cash ISA.

They were available for children born in the UK between 1st September 2002 and 2nd January 2011.

The government added £500 to each CTF on opening, but this isn’t the case for Junior ISAs.

Unfortunately, CTFs are no longer available to new customers. However, it is possible to transfer a CTF to a Junior ISA. Speak to a financial adviser for more information.

NS&I premium bonds for children

Premium bonds are a popular investment option for those looking to invest for children. They are offered by National Savings & Investments (NS&I).

You can buy any whole-pound amount of bonds between £25 and £50,000, and every month of the year, each £1 bond is entered into a cash prize draw. Every month, two lucky premium bond holders win £1m, whilst many more enjoy prizes from £25 upwards. All winnings from the prize draw are completely tax-free too.

You can involve children in checking the prize draw results each month, which can help increase their understanding of money.

The maximum you can invest into premium bonds is £50,000. Note: these investments provide no savings interest and any return on the product is derived tax-free from the prize draws (which are not guaranteed to generate anything!).

These can however, provide an alternative for saving funds if you are restricted by the Junior ISA allowance.

Unlike other saving options, that only allow money to be paid into them by parents and require parental/ guardian oversight, premium bonds can be purchased by grandparents too as a way to save for future generations.

When your child turns 16, they can have the premium bonds assigned to them.

Children’s easy access savings account

A children’s easy-access savings account is a bit like an ordinary savings account you might have for yourself.

Depending on the terms of the account, you should be able to deposit and withdraw funds as and when you like without giving prior notice. Typically, in an easy-access account, you will receive a lower rate of interest than with other account types.

Any savings interest that is earned, however, will be liable for tax. Should the interest exceed £100, the full interest earned will be added to your own tax liability (parent). This is known as the ‘£100 rule for parents’.

£100 rule aside, these accounts can help teach your children about handling money as they will have passbooks, allowing your child to withdraw their own money (usually with a parent/ guardian present) in branch.

Children’s regular savings account

A regular savings account commits you to making regular monthly contributions.

Monthly contributions do not need to be necessarily high with many allowing a maximum of £100 to be paid in per month. Interest rates are not typically high, roughly 3% is seen as a good rate to expect.

Unlike an easy-access account, regular accounts usually have stringent withdrawal limits. Withdrawals will either be unavailable until a specific time in the future, or only available a number of times each year.

Failing to make a deposit or exceeding the number of allowable withdrawals can result in interest being lost.

Any interest earned in a regular savings account is also liable to tax, with the £100 rule applying to all interest earned.

These accounts are good for those wishing to save for something specific or for people who like to save for their children in a disciplined way through regular payments.

If you are looking to deposit more than £100 a month, these accounts may not be suitable for you, speak to a regulated financial adviser for alternatives.

Investing for your child’s future

Aside from cash savings and Junior ISAs, investments can be held for children in a Bare Trust or a designated account. The designated account will be set aside for your child, still in your name, and treated as your investment.

Income generated in a designated account, in excess of £1,000, will be liable to tax at your applicable tax rates. However, in a bare trust, any income will be treated as your child’s for tax purposes.

There are multiple risks associated with investing despite the potential to generate larger returns than interest earnt on cash. For more information about investing for your children via a designated account or a bare trust, please speak to a regulated financial adviser.

Children’s Pension

Now, this might not be for everyone, and to many it may seem a very long-term approach but, you can open and contribute to a pension on behalf of your children/grandchildren.

The money will enhance your child’s retirement pot and when they are able to access their pension, they may well be glad to have money set aside for their retirement.

Once your child reaches 18, assuming they find employment, they will be able to take over the contributions and create a good savings habit for the rest of their adult life.

Unlike other savings options, the money saved in a pension does not risk being squandered by a young adult, as easily as a cash amount saved via a regular savings account can. Your child will not be able to access the funds until they reach the pension age.

The maximum you can pay into a child’s pension is £2,880 each year and with children receiving an extra 20% tax relief on contributions, this results in an extra £720 in tax relief, lifting yearly contributions to £3,600.

With time on their side, the upside potential for growth is huge through compound annual growth.

To conclude

Children are entitled to a tax-free income tax personal allowance, for 2022/23 tax year this is set at £12,570. In addition to this, they are entitled to the £5,000 starting savings allowance and the £1,000 personal savings allowance. This means children, whilst not earning a salary, can receive as much as £18,750 per annum from savings without paying income tax.

The only caveat to the above is the £100 rule for parents whereby savings given to a child by a parent or stepparent is taxed at the parent’s applicable tax rate (basic, higher or additional) – if it generates more than £100 per year in interest. This does not, however, apply to grandparents, other family members or friends.

Identifying the most tax efficient way to save and invest for children can include a combination of the above solutions. Your own tax efficiency is important too, so to best understand how to save and invest for your children’s future, which products to utilise and what saving/investment strategy to use, we highly recommend you speak to a financial adviser.

Our team of award-winning Chartered Financial Advisers are available to help and offer a free initial meeting to discuss the options available to you.

Important information: This article is prepared for general circulation and is intended to provide information only. The information contained within this article has been obtained from industry sources that we believe to be reliable and accurate at the time of writing. It is not intended to be construed as a solicitation for the sale of any particular investment nor as investment advice and does not have regard to the specific investment objectives, financial situation, capacity for loss, and particular needs of any person to who it is presented. The investments contained in this article may not be suitable for all investors. Prospective investors should carefully consider whether any of the investments contained in this document are suitable for them in light of their circumstances and financial resources. If you are in any doubt whether any of the investments contained in this document are suitable, you should take appropriate advice from a professional adviser, such as an accountant, a lawyer or Financial Adviser authorised and regulated by the Financial Conduct Authority. Investment Risks The value of investments and the income from them can fall as well as rise. An investor may not get back the full amount of money that they invest. Past performance is no guide to future performance. Foreign currency denominated investments are subject to fluctuations in exchange rates that could have a positive or adverse effect on the value of, and income from, the investment. Investors should consult their professional advisers on the possible tax implications and other consequences of their holding of any of the investments contained in this publication.