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Save for your children's future

Are you saving for your children’s future? Putting aside even a small amount each month for your kids now can really pay off when they reach 18

Published 01 Apr 2008

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Saving for children isn’t something everyone can afford – but if you can, even a few pounds put into a savings account each month can grow to a respectable sum by the time they reach 18.

Savings accounts for children
Children's pensions
How to save tax free
Child trust funds
Are there any risks involved?

Savings accounts for children

The easiest way to save is to open a bank or building society account designed specially for children. Use it to make occasional deposits or pay in a fixed amount each month. To encourage kids and their families to save, these accounts generally offer higher rates of interest than other savings accounts – around five per cent or more per year.
A pile of coins

If you’d like to make a regular contribution to your child’s account, one option
is to save your child benefit. This would amount to well over £20,000 by the time your child is 18. Alternatively, if you saved just £1 every week, by the time your child was 18 you would have saved around £1,327.

Children’s pensions

If you worry that all that hard-saved money will get frittered away on a drunken holiday in the Canaries, why not take out a pension instead – not for you, but for your child. Stakeholder pensions have no lower age limit, so you can set one up for your child any time from birth onwards and anyone can add to it. The taxman will pay in 22p for every 78p you put in, so it’s saving with the Government’s help. When your child turns 18, he or she becomes owner of the plan, but cannot use the money until they are older (usually 55).

How to save tax-free

If you give your child money to invest, you’ll have to pay tax on the interest if it comes to over £100 in any tax year – but there are tax-free ways to save. National Savings & Investments is government-backed and has a range of tax-exempt products for children. Their Children’s Bonus Bonds offer a guaranteed rate of interest and a bonus every five years. Another option is Premium Bonds: you invest a minimum of £100 for your child and they have a chance to win up to £1 million in each monthly draw.

Child Trust Funds

Children born on or after 1 September 2002 get a head start through the Government’s Child Trust Fund (CTF). When your child is born, you get a £250 voucher to invest: this money belongs to your child, but she can’t touch it until she’s 18.

If you do nothing with the voucher, after one year the Government will invest it in a stakeholder account for you – but it’s easy to do it yourself. Most banks, building societies and even supermarkets offer CTF accounts, and there are three types to choose from:

A traditional savings account
One that invests in shares in companies
A stakeholder account, which also puts the money into shares but with more protection and management.

If you pay the £250 voucher into a savings account and add nothing, it will only grow to £460 by the time your child is 18, so the best way to make the money work is to top it up. But even if you add just £10 a month from when your child is born, by the time they turn 18, the fund could grow to around £3,400 in a savings account, or £4,710 in a stakeholder account.

Are there any risks involved?

The Government recommends you put your child’s CTF money into a stakeholder account, which invests in shares. That’s because, in the long term, these tend to do better than normal savings accounts. We tend to think of shares as risky, but the beauty of saving for a child is that the investment is spread over at least ten years. This means that any drop in share values usually has time to balance out again.

Whatever saving method you choose, the key is to act now while your children are young. You don’t have to be a financial whizz or set aside vast sums of money – even a pound a week will ensure that, by the time your child is ready to fly the nest, they will have a nest egg to help them.

Expert tips

Four pearls of financial wisdom from our expert Paul Lewis, author of Money Magic and Live Long and Prosper and presenter of Radio 4’s Money Box.

WHEN?

It’s never too soon to start saving for your children. Every year, the money saved earns interest – and the next year, the interest earns interest! It’s as close to money for nothing as most of us ever get.

WHERE?

Find the savings account with the highest interest – but remember, today’s best buy is tomorrow’s old rag, so check how it compares to other options each year at www.moneyfacts.co.uk or www.moneysupermarket.com and move the money as deals come and go.

WHO?

If you open a savings account for your little one, tell grandparents, godparents, uncles, aunts and second cousins twice-removed, so that if they want to give your child a few quid at birthdays or Christmas, they can put it directly into the account. Close relatives could even take out a standing order – even £2 or £3 a month will build up nicely.

HOW?

Children have a tax allowance like us, but unless they have £100,000 saved up you probably don’t need to worry about them paying tax on the interest. Make sure the bank or building society knows that the money in the account is for a child under 16. Fill in form R85 so interest is paid gross without tax being deducted.