Other Ways to Save for your Child
There are different ways to save for children, from encouraging children to put some of their pocket money in a piggy-bank money box to long-term investments in shares.
Whatever you decide to do there are some things to consider before deciding what kind of account is best or which firm to open an account with:
- Whether you want to save for the short term or the long-term - you can usually earn more when money is invested for a longer time but this might not be best for your circumstances;
- Whether it is possible to take money out quickly if you need to;
- Any charges made for running the account; and
- The likely return you will get for your money, this could be interest on a bank account or gains made on investments in shares.
Banks, building societies and other financial organisations have designed a range of accounts especially for children. Here is a summary of the main ways of saving or investing for children.
Savings Accounts
Most banks and building societies offer special cash accounts aimed at children and young people. Click here to search moneyfacts.co.uk for the best accounts currently available.
In most cases parents can arrange for children to get the interest on their savings without tax taken off. You do this by completing form R85.
If the child's total income, including interest, is expected to be less than their personal allowance, interest can be paid 'gross' (that is, without tax taken off) until 5 April after their 16th birthday. To arrange for interest to be paid gross a parent or guardian must complete the form R85 "Getting your interest without tax taken off" with the child's details, sign it on his or her behalf and give it to the bank or building society. There are special rules if the savings have been given by a parent - see Tax on Children's Savings below.
This link takes you to form R85 along with a help sheet
* Adobe Reader is required to view this PDF file.
Individual Savings Accounts (ISAs)
One way of saving for children without having to pay tax is to use Individual Savings Accounts (ISA). An ISA is a special account that allows you to save in either cash or other investments, for instance, insurance or shares, without you having to pay tax on the income or gains you make.
At the age of 16, young people can have a cash ISA in their own right with the same subscription limits as adults. Young people under 18 cannot hold investments in an ISA themselves, but you could use your ISA to save for them.
Click here to be taken to the ISA section of Chartwell's Wealth Management website.
Friendly Societies
These are mutual organisations - this means that the people who have investments in the society are members of the organisation - that usually offer a range of savings and investment products. They can be attractive because they can offer tax-free savings products for children which allow you to save £300 a year tax free.
You should bear in mind that these products are not usually suitable for short term saving or investment.
National Savings
National Savings & Investments products provide another way of saving. All NS&I products are backed by the Government and all capital invested is 100% guaranteed. There is a range of products available some of which are particularly suited for children. Full details of all National Savings and Investments products can be found on their website.
Investment Funds
These are funds in which your money is pooled with other people's money and invested in a wide range of shares in companies. You can make money if the companies do well and the value of the shares goes up, but you can lose money if the value of the shares falls.
Your child cannot invest their money in shares, but an adult can invest for them (this is known as a trust) or add the child's name to the account holder name.
Over the longer term, stock market funds have tended to make more money for investors than other types of investment but shares are more risky than, for instance, deposit accounts in banks or building societies, as the value of shares can go down if companies are not doing well. That is why investing in shares is not a good idea for a shorter period of, say, less than 5 years.
There is a wide range of investment funds on the market and if you are interested in finding out more about them please contact us.
Tax on Children's Savings
Children can have a certain amount of income before they start paying tax. They are entitled to the same personal allowance as adults. So, for the tax year 2006/07, they can claim back the tax on their savings income if their total taxable income is less than £5,035.
There are special rules if the savings have been given by a parent. Parents can be taxed on income from a child's account but only when gifts from a parent produce more than £100 gross taxable income a year. If that is the case the whole of the income from the gifts is normally taxed as that parent's income. A child cannot get back any tax on that income. The £100 rule applies separately to each parent. This rule does not apply to income that is tax free, such as income in a Child Trust Fund account or on a tax-free savings product from a friendly society.
Capital Gains Tax is charged where a person has sold an asset and made a gain. This can apply to investments, such as shares, where the capital has increased in value. In most cases any gain will be covered by the child's annual Capital Gains Tax exemption. This is £9,200 for the tax year 2007/08.
