Saving for your children – what options do parents have?

9th April 2014

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You might assume that saving for the future is the last thing on adolescent minds, but new research has shown exactly the opposite writes Kara Gammell.

According to a survey from Santander, 95% of teenagers are putting money away for a rainy day. Funding further education is at the top of the list of priorities for children between the ages of 11-16, with more than one in four setting cash aside for this purpose.

Youngsters appear to be balancing their books carefully, dividing their monthly income equally between spending and saving, putting away an average of £336 annually.

But while many parents agree that this is a valiant effort, with the rising cost of university and escalating property prices, the total amount kids can put away in just a few years is likely to fall short of the amount they need to achieve their goals.

If you want to help your children beef up their bank balances, there are a number of ways that you can help them maximise their returns.

HELP THEM CHOOSE THE RIGHT ACCOUNT

It is essential to get the right account for your child in order for them to get the most bang for their buck.

“It’s sensible to invest for your child’s future and to encourage the savings habit from an early age, especially with the rising costs of living,” says Rachel Springall, spokesman at statisticians Moneyfacts.co.uk.

“But savers need to remember that it’s the suitability of the bank account they chose and the rate of interest, which should be the main reason for taking it out.”

There are a number of accounts on offer for children, such as instant access, fixed-rate bonds, regular savers and Junior Isas.

What you choose will depend largely on whether you want your child to be able to access the cash and whether you want your child to be able to make small, irregular deposits.

Another factor to consider is tax. Many parents wrongly assume that children are exempt. In fact, like adults, children have a personal allowance of £10,000 a year.

So as long as their annual income, including interest from savings, is below this amount, they can receive interest on savings without having tax deducted. Those opening a children’s account should sign an R85 form, which will ensure that interest is paid gross.

However, bear in mind that while parents can invest as much as they like in an account on a child’s behalf, if the money either parent gives their child earns more than £100 a year in interest (or a total of £200 for both parents), the entire amount will be taxed as if it were their own. Although, this rule does not extend to friends or other relatives such as grandparents, who are free to deposit as much as they like into a children’s account.

And it is easier than you think to exceed this limit. Figures from SavingsChampion.co.uk, for instance, show that at a rate of around 3pc, a parent would fall foul of this rule on savings of about £3,300 and as the amount increases over the years it could have a significant impact.

The best accounts on offer include Halifax’s Regular Saver, which pays 6pc fixed for 12 months, but you must pay in between £10 and £100 every month and no withdrawals permitted during this time. While the bank’s Young Saver account and Lloyds Bank Young Saver both pay 3pc and allow instant access, however, both are only available in branch.

If you plan on depositing heftier sums for your children, then a Junior Isa is worth a look.

All children born before September 2002 and after January 1 2011 are eligible for this type of tax-free savings account and anyone – friend or family – can contribute £4,000 a year.

There is no capital gains or income tax to pay on these accounts, and, like adult Isas, you can choose whether to save into a cash account, stocks and shares, or a mix of both.

Once cash is invested, it belongs to the child: parents can’t repossess it.

The top Jisa accounts on offer come from Halifax and pays 6% (so long as the parent holds an adult Isa with the bank), while Coventry Building Society and Nationwide Building Society pay 3.25%.

ADD TO THEIR NEST EGG

“It’s a difficult time for families to find any spare cash in the current economic climate, but it’s important to think longer term and saving regularly for your children will give them a head start later in life,” says Andrew Hagger, independent personal finance analyst from Moneycomms.co.uk.

If you can afford to deposit cash on your child’s behalf, the magic of compound interest means no matter what the amount, the earlier you start, the better.

Mr Hagger says: “Parents who save £10 a month in an account paying 3%, will see their balance grow to £2,855 in 18 years. While those who can put away £50 each month, would see their child’s nest egg grow to £14,276 over the same period.”

TEACH THEM TO EARN, SAVE & SPEND RESPONSIBILY

If you want to instill good spending and savings habits in your children, there is no time like the present as research from the government-backed Money Advice Service found that adult money habits are set by the age of seven.

If you want to get your children into the habit of saving, there are a number of fun and interactive options to encourage money management skills.

GoHenry.co.uk, for instance, is a pocket money service aimed at 8 to 18-year olds that enables parents to pay children on task basis and funds are loaded onto a pre-paid Visa debit card. With this online tool, parents can set spending rules and limits while children can earn cash for doing extra tasks.

A similar tool for younger children is Goldstarsavingsbank. This iPad app is aimed at four to 11-year-olds and encourages children to save money for specific rewards, as well as earning money for doing jobs around the house.

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