Saving and investing for children
Last updated on 6 April 2016
What to consider
If you're saving or investing for a child you need to first decide:
- do you want to invest a lump sum or a regular amount?
- how long do you want to save or invest for?
- how much risk are you prepared to take?
There's a wide range of savings and investments open to children as well as products designed specifically for children. Some are tax-free, others aren't but most children are non-taxpayers anyway.
Savings accounts for children
Most banks and building societies offer special accounts for children which can pay attractive rates of interest as they are expected to be held for a long time.
Children may be offered free gifts when they open an account, but the most important factor is the interest rate.
Banks and building societies now automatically pay interest without any tax deducted. Unless your child has a lot of income, it’s unlikely they’ll have to pay tax on their savings. New rules from April 2016 mean that anyone with total taxable income of less than £17,000 a year doesn’t pay tax on any savings income they have. For more details see our guide on How savings are taxed.
One thing to watch out for is if a parent deposits a large sum of money in their child's savings account. If this results in interest of more than £100 being paid (or £200 if both parents contribute), then all of the income is taxed as though it belongs to the parent.
National Savings & Investment Children's Bonds
These are 5-year lump-sum investments for children under 16. You can invest between £25 and £3,000 in each issue of the bonds. They earn a guaranteed rate of interest and all interest is tax-free for both the child and the parent. If the bonds are cashed in early there is a penalty equivalent to 90 days interest on the amount cashed in.
Friendly society bonds
These tax-free savings plans invest in share-based funds which run for 10 to 25 years. You can invest up to £25 a month in a plan but watch out for charges as these can be high.
Junior ISAs (JISAs)
JISAs were launched on 1 November 2011 to replace Child Trust Funds (CTFs). Parents can invest up to £4,080 in a JISA in 2016-17 for their child and this money is then locked away until the child reaches 18.
There are two types of JISAs - cash JISAs and stocks and shares JISAs. Any interest or income earned on savings in a JISA is tax-free. Children can invest in both types of JISA within the same tax year as long as they do not exceed their annual JISA allowance. For example, they could invest £1,500 in a cash JISA and £2,580 in a stocks and shares JISA in the same tax year.
Any child under 18 is eligible for the scheme providing they don't have a CTF.
Child Trust Funds (CTFs)
These are no longer available to new investors. CTFs were introduced in April 2005 to encourage long-term saving for children. They can be straightforward savings accounts or invest in shares.
Children born on or after 1 September 2002 were given money by the Government to open an account which family and friends could then contribute up to £1,200 a year to. All income and gains from the account are tax free.
Parents with children who already have an account can still contribute to them and can still change providers. The CTF limit for the 2016-17 tax year is £4,080.
You can transfer your CTF to another provider or fund whenever you like. You can also move the CTF account to a JISA if you prefer.
To make the transfer, contact the new CTF or JISA provide and it will transfer the account for you. Don't forget to ask about fees if you're moving to another stock market-based investment.
Once a child is 16 they can take over the management of their account but they cannot take the money out until they are 18.
Children who are 16 or 17 can invest up to £15,240 (2016-17) in a cash ISA each year. They can do this even if they have already have a JISA.
There is also a Help to Buy ISA which is available for anyone aged 16 or over. Interest is paid tax-free and it also pays a government bonus of up to £3,000, providing the money is used to buy a first home. For more details, see our guide on Help to Buy ISAs.
Investments for children
You can invest in a unit trust, OEIC or investment trust for a child. Usually investments such as these are held in an account for the child which is administered by the parents until they turn 18.
Stakeholder pension schemes
You can invest from £20 to £2,880 net (this works out at £3,600 gross) a year in a stakeholder pension for a child. Contributions attract tax relief at 20%. So if you invest £80 the tax relief is £20, so £100 is actually invested for you.
You can contribute to the pension when and how often you like but this money must remain invested until the child is 55 years of age.