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Friday 11th March 2022
What's it all about?
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We often talk about saving as “making an investment in the future”, and that’s never more true than when you’re putting money aside for your kids. You’ve got a wide range of options when you start saving for your children’s futures, and each comes with its own set of benefits and pitfalls. The best choice for your family will depend on your specific situation, goals and expectations.
Just like adults, children can have savings accounts opened in their names. The main difference with a children’s instant access account, naturally enough, is that the account holder needs to be under 18 years old. Most banks and building societies will offer some kind of specialised savings account for kids, and the instant access types mean money can be paid in and withdrawn whenever needed. The interest rates might still be pretty low compared to some other savings or investment options, but they can still outperform savings accounts designed for adults. As with any account that pays interest, though, you’re basically at the mercy of the inflation rate. If inflation is high and interest rates are low, every pound in a savings account will be losing real-world value over time.
Opening a savings account for a child can be a great way to start teaching them about handling their money safely. They can also help get kids used to dealing with bank accounts in general. Depending on the account, your child might get a passbook to use for withdrawals (you’ll probably have to be there when they do it, though), and letting them get some hands-on experience of controlling their personal money is a great first step toward teaching them some financial responsibility.
With a regular saver account, you’re going to start seeing a few extra rules about how your child’s money is handled. For one thing, there are probably going to be limits on how much, or how little, can be paid in each month. The account might have to be topped up by between £10 and £100 per month, for instance. The point is to encourage the account holder to develop some regular saving habits, but those restrictions can come with some benefits attached. You’ll tend to find they pay out higher rates of interest, for example. That’s definitely a plus, but it’s worth keeping in mind that they might be a bit restrictive if you were planning to save more than the limits allow. Also, most accounts of this type only last for a set amount of time, often 12 months. During that time, you won’t be able to withdraw any of the cash you’re setting aside.
Junior ISAs are another savings option that a parent or guardian can set up for someone under 18 years old. There’s a limit set on how much money you can sock away in one of these each year, which comes to £9,000 as of 2020/21. Once the cash is in there, though, it’s going to stay there for a while. The child won’t have access to it at all until they turn 18, at which point the account loses the “junior” part of its name and becomes a normal ISA. The child can still take control of the account before this, though, potentially making some important decisions about it from the age of 16. They still won’t be able to take the money out until they’re 18, though.
Since these accounts have the same basic set-up and rules as any other ISA, all the interest paid out (or any investment growth in the case of stocks & shares ISAs) comes free of tax. Great as this is, it’s still worth remembering that a cash ISA paying interest might not keep up with the rate of inflation. That means the value of your child’s savings could still be dropping in real terms. Even so, this can still be a good option for saving toward your kids’ futures without burning through your own ISA pay-in allowance of £20,000. You can also use payments into a junior ISA to help bring down Inheritance Tax charges.
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As with normal ISAs, the junior ones come in two basic varieties: cash or stocks & shares. The difference with a stocks & shares ISA is that the money is invested in the stock market. Instead of paying out a pre-determined rate of interest, these accounts grow in value according to how well those investments are doing. If your kid’s young enough that they won’t be able to access the money in their junior ISA for 5 years or more, stocks & shares ISAs can be a strong choice. That’s about the length of time you’d expect to get a stable, consistent return on the investment, riding out any shorter-term turbulence in the stock markets.
Why would you pick this admittedly riskier route for your child’s savings? Well, for one thing you’re banking on getting better returns than with an ISA that pays a flat rate of interest. While they’re less predictable than cash ISAs, stocks & shares ones are often able to perform better over time. So, if you’re worried about inflation eating away at the value of your child’s savings, stocks & shares ISAs might be worth looking into.
You don’t need to be an investment expert to use a stocks & shares junior ISA. You can pick a ready-made one that basically chooses and manages the investments for you. There may be some platform or management fees for this, depending on your situation and ISA, but it does take a lot of the effort and hassle out. Instead of deciding on every investment separately, you choose an ISA with a pre-set “basket” of them. Your decision will be based on the level of risk you’re prepared to accept.
If you’re willing to put the work in, though, you can go for a self-invested ISA instead. With these accounts, you pick and choose your own investments more directly. Financial advisers often talk about the importance of “diversifying your portfolio” – which is basically just a technical way of saying don’t put all your eggs in one basket. Spreading your investments out over a wider range of businesses and markets is usually safer than putting all your savings in one place.
Whichever option you decide on, always remember that no investment in stocks & shares will ever be 100% safe. The value of this type of ISA can drop as well as climb, even with investments that tend to be low-risk. Make sure you go in with both eyes open, and never take risks with money you can’t afford to lose.
To learn more about investing in stocks and shares, take a look at our other article, “Best Beginner Investment Funds for 2022” - and keep checking back here for more money tips and updates. We’re experts at saving you cash and we’re always here to help. That’s the reason why you’re better off with RIFT.
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