Investing for children

The different types of savings accounts for children

As a parent, nothing matters more than giving your children the best possible start in life - and that means giving them a head start on their savings.

There’s a variety of ways you can put money aside for your children’s future, ranging from simple bank accounts to long-term investments.

Below we’ll look at a few of the most popular options, but remember, what’s right for you and your family will depend on your own circumstances. For tailored financial advice, you can book an appointment with a Specialist Financial Adviser from Wesleyan Financial Services.

Cash Junior ISA

A Cash Junior ISA is a tax-free savings account which allows you to save up to £9,000 on your child’s behalf this tax year.

Interest rates on Cash Junior ISAs are typically higher than you might expect on an adult version, and there’s no tax to pay on any interest that’s accrued.

There’s also no restriction on who can pay in, so grandparents or family friends can contribute towards your child’s future too.

The child takes control of their Cash Junior ISA at 16, but crucially, no money can be withdrawn until your child turns 18. At this point the account becomes an instant access ISA in their name. Find out more about Cash Junior ISAs in our comprehensive guide.

Pros and cons of Cash Junior ISAs

Instant Access and Regular Saver accounts

If an ISA isn’t right for you, there are plenty of other ways to save for your children.

You can open a basic savings account for under 16s with most banks or building societies. Usually, you can choose between an Instant Access account or a Regular Saver account.

As the name suggests, an Instant Access account lets you pay money in and take money out whenever you want, but you’ll typically earn less interest.

A Regular Saver account will usually offer a better interest rate, but will only let you pay in a certain amount of money each month (typically between £250 and £500) - limiting how quickly you can build the pot.

Bear in mind too that anytime access to funds can be something of a double-edged sword. It's handy for ad-hoc expenses, but a hindrance if you’re saving for the long term.

Pros and cons of instant access accounts

Fixed-term savings accounts

If you have a single lump sum you’d like to lock away for your child’s future, and you don’t want to invest it in an ISA, a fixed-term savings account might be an alternative option.

You’ll be able to fix an interest rate, usually for up to 5 years (the longer the term, the higher the rate). That means it’s easy to calculate exactly what your money will be worth at the end of the term.

Bear in mind that you usually won’t be able to take money out or pay any money in after your initial deposit. So there’s no opportunity to build the pot beyond the interest you receive.

It’s also worth remembering that by locking in your rate, you’d see no benefit from any interest rate rises. You wouldn’t be able to switch to another provider without incurring penalties, either.

Pros and cons of fixed-term savings

Investing in a stocks and shares Junior ISA

While some parents may prefer the simplicity and certainty of saving, others want the potential for their money to go further. It’s not without risk, but investing in a stocks and shares Junior ISA could help your money grow while your children do.

A stocks and shares Junior ISA (such as Unit Trust Junior ISA from Wesleyan Unit Trust Managers) enables you to put money into a range of investments on your child’s behalf. Thanks to the ISA wrapper, there’s no tax to pay on any potential gains from your investments.

You (or your family and friends) can pay in up to £9,000 per tax year. Your child will take control of the account on their 18th birthday.

Depending on the type of stocks & shares Junior ISA you choose, you may be able to select the investments yourself, or you can simply opt for a fund which is professionally managed on your behalf. At Wesleyan, you can choose from a range of managed funds to suit your appetite for risk. Read our guide to Junior ISAs.

Keep in mind that the value of all investments can go down as well as up, so you could get back less than what you put in.

Pros and cons of stocks and shares Junior ISA

Tax considerations when you save or invest for children

It’s often thought that children are exempt from tax, but that’s not quite the case. They’re actually liable for income tax in the same way that adults are. The only difference is, most children don’t earn income above their personal tax allowance of £12,570.

If that income is from savings interest, additional tax-free allowances mean a child can actually earn up to £18,570 before paying tax.

All this makes it highly unlikely your children would ever have to pay tax on their savings. But unless you’re saving into a tax-free ISA, you (as a parent or guardian) may well become liable.

If your child earns more than £100 a year in interest as a result of your contributions, it’s effectively classed as your income, and added to your tax bill accordingly. The limit can be doubled to £200 if both parents combine allowances though, and no tax will be payable if it’s within your own Personal Savings Allowance.

Remember, this rule doesn’t affect ISA contributions. Regardless of how much interest is received on a Junior ISA, it stays tax-free both for your children and for you.

Tax treatment depends on your individual circumstances and may be subject to change in future.