Have your children received money for Christmas? Not sure what the best options are for saving the money? Read David Vaughan’s latest finance blog.
Opening a first bank account for a child is often the result of receiving a cheque for Christmas or a birthday. This month, we take a look at some of the different options available for saving this money.
Child Trust Fund (CTF)
Children born between 1st September 2002 and 2nd January 2011 can open a Child Fund Trust. The money belongs to the child but it is locked away until they reach age 18. You can add up to £3,720 a year to the account and there’s no tax to pay on the CTF income or any profits it makes. It won’t affect any benefits or tax credits you receive. The money in a CTF could be invested in shares or deposited in a bank account, depending on your preference.
Junior ISAs are available to children under the age of 18 who were not entitled to a Child Trust Fund. A Junior ISA works in a similar way, where the money is locked away until the child reaches 18 and the profit/interest is tax free. A significant difference is that it is possible to open both a Junior Cash ISA and Junior Stock & Shares ISA, but the total annual contributions must not exceed £3,720.
With both a CTF and Junior ISA you need to be confident that the money will not be required before age 18. It is also worth noting that at age 18 the child will have full access to the money, regardless of your wishes at that time.
Child Savings Accounts
Most banks and building societies offer special savings accounts for children, which typically pay higher interest rates than similar adult accounts. Normally the money is easily accessible, although some may have notice periods (e.g. 90 day notice for withdrawals).
In order to receive the interest without deduction for tax, it is important to complete HMRC form R85 when opening the account. This declares that the child is a non-taxpayer and means that you will not have to reclaim overpaid tax on their behalf each year.
Where parents are saving into an account on behalf of their child, they should be aware that the income/interest is taxable as if it is the parent’s income where the total income/interest exceeds £100. The limit for parents is an ‘all or nothing limit’. So if the income from a parental gift is £99 per year it is taxed as income of the child, but if it is, say £102, then it is all taxed as income of the parent.
National Savings provide a further tax free way to save over the longer term with Children’s Bonds. Between £25 and £3,000 can be invested for a period of up to five years with a fixed return. The money can be accessed early but will be subject to a penalty.
Premium Bonds do not pay interest, but are entered into monthly prize draws. As well as a £1million jackpot, they also pay out over a million other prizes from £25 to £100,000 every month. Any winnings are tax free. The main disadvantage of Premium Bonds is that the real value of the initial capital will fall over the years as the cost of living rises.
A very long term option is to make a contribution into a personal pension for a child. It is possible to pay up to £2,880 per year into a pension, which will attract an additional 25% tax relief from the government. The money is tied up until at least age 55 and then needs to be used to provide a pension income for life. Although this is a very long term investment, the effect of compound returns means that even a modest investment now could result in a significant pension fund by the time they retire. It really is a gift that’ll keep on giving!
This information contained within this article is for information only and does not constitute financial advice.
Author: David Vaughan is an EssexBaby.co.uk blogger, as well as a Chartered Financial Planner at Plan Money Ltd. Tel: 01206 257501 www.plan-money.co.uk