Saving and investing for children
Last updated on 22 July 2015
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 you are prepared to take?
There's a wide range of savings and investments open to children and some are specifically for children. Some are tax-free, others aren't but most children are non-taxpayers anyway.
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.
Any interest earned on savings counts as taxable income. But if you're a non-taxpayer, and most children are, there's no tax to pay. If you fill in form R85 when you open the account, interest will be paid gross. Otherwise you can reclaim any tax already paid by completing form R40.
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.
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. If the bonds are cashed in early there is a penalty equivalent to 90 days interest on the amount cashed in.
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.
JISAs were launched on 1 November 2011 to replace Child Trust Funds (CTFs). Parents can invest up to £4,080 in a JISA in 2015-16 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.
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 2015-16 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.
Investments for children
You can invest in a unit trust, OEIC or investment trust for a child. Although returns are taxable, if you set the investment up as a trust there is often little tax to pay as most children are non-taxpayers.
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.