Ways to save money for kids tax-efficiently
How To Save Money For Your Kids
Putting funds aside for your children is a great way to save money while doing something that benefits them in the future. They could use the money you save for educational expenses, to put towards a first home, or to buy a car, for example.
There are several tax-efficient options available in the UK that make saving on your children’s behalf even more attractive. Saving money doesn’t just mean having a bank account – there are junior ISAs, child pensions (yes, really), and trusts to consider too. You can save money and help your children build good financial habits that last at the same time.
4 ways you can put funds aside for your children
- Bank accounts
Setting up a bank account in your child’s name is an easy way to make sure your child has savings of their own as they get older. It can also help them learn the habit of putting money aside.
However, money can be withdrawn from a child’s bank account in the same way that it can be withdrawn from an adults’. This means that as your children get older, you may have less control over what they use it for.
There is also a limit to how much you can save in their name before tax has to be paid. There is an allowance of £100 interest income on money given to them per parent, at which point you become liable for tax. This doesn’t apply to money given by other relatives or friends, however.
- Junior ISAs, or JISAs
Just like adults, children can have ISAs, or Individual Savings Accounts. The rules are different for ones in children’s names, however. Up until the age of 18 they can have a JISA their parents open. At the age of 16 or 17 they are also able to open their own. And at the age of 18, JISAs convert to ISAs. The Junior ISA scheme replaced the child trust fund (CTF) in 2011, so children who already have a CTF cannot have a JISA as well.
You can pay up to £9,000 per tax year into a Junior ISA and it is a tax-efficient way to save money for your children. Instead of the money remaining in your estate and being liable for inheritance tax (IHT) when you die, this money is passed on tax-free.
Money that is paid into a JISA cannot be withdrawn until the child turns 18 years old. This means that neither you nor the child will have access to it before then. And when they turn 18, it belongs solely to them - giving them full control over how and when they spend it. If you have fully funded a JISA for even just a few years, this will be a sizeable amount of money. You will need to carefully consider whether you wish your child to have full access to this amount of money at this age.
- Junior pensions
A junior pension can sound like a strange idea as we tend to associate pensions with working - and with getting old. A financial adviser will encourage people to pay into a pension pot as soon as they start working, but even sooner is even better. Pensions are really just a means to save money for when you retire. Therefore, the sooner you start, the more you should be able to save - tax efficiently.
Only a parent or guardian can start a pension for a child, but once it’s been established, anyone can pay into it. They are available from birth and currently you can pay in up to £2,880 per year. When you add the government tax relief of 20%, the £2,880 you pay in becomes £3,600. This allows your money to grow more quickly, at no cost to you.
When the child is 18 years old, they will control the pension but will not be able to access the money until they reach the normal minimum pension age. In 2028 this will go up to 57, and it is expected to rise further in the future.
A child pension builds a solid foundation for future retirement savings, but you must be comfortable with the money being locked away until retirement age.
- Trusts
Trusts work in a similar way to adult investments. Children are not allowed to invest themselves, so any investments must be managed for them. You can set up a trust for your child and become a trustee. With a discretionary trust, trustees make all the financial decisions about what to invest in, as well as anything else relating to the trust.
Trusts can be a tax-efficient way to manage funds for your children. They offer flexibility and a choice of what to invest in. They can be used to protect assets later in life too. For example, if they were to get married and then divorced, a trust could ring-fence family money.
Unlike Junior ISAs, there is no limit to how much money can be put into a trust. If you want to gift money (within the allowances permitted), after seven years it can reduce the amount of IHT you will be liable for. Trustees are also able to control when funds are paid out and for what reasons.
Trusts are more flexible than things like Junior ISAs because funds can be accessed before the age of 18 if necessary. They can also be used for more than one child. They can, however, be quite complex to set up and manage.
Deciding on the best ways to save money for your children
Given the different options available, it’s important to consider carefully how saving money for your children would work best for your family. If you don’t want your child to have access to, potentially, £50,000 or more a the age of 18, a trust would be a good option.
Discretionary trusts allow more than one child (and potential future children) to benefit, and money can be paid in by regular contribution or as lump sum(s). Access to funds has to be collectively agreed by the trustees.
Many people start with Junior ISAs as they are simple to open and manage. They may later turn to other options. Some people will combine strategies: there’s no right or wrong answer: it all depends on your circumstances and goals.
Get the right financial advice
At Paula Bicknell Wealth, we can advise you on what the best strategy would be to make tax-efficient, effective investments to benefit your children. Working with us will help you understand what suits your circumstances and what you hope to achieve. We’ll help you find the best solutions. It’s vital that you make an informed decision before committing to any course of action.
Do you need help with saving money for your children and investing wisely in their futures? We’re here to help: just get in touch. If you are based in or near Theale, Reading, we can meet with you in person. However, we also have many clients across the country as we are also able to work virtually. Give us a call and start investing in your children’s futures now.
The value of an investment with St. James's Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.
The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief is generally dependent on individual circumstances.
Trusts are not regulated by the Financial Conduct Authority.
