How best to invest in your children

By Martin Lewis, November 15, 2012
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It is the gift that keeps on giving. Why not give your children money for a savings account to start a nest egg this Chanucah? Then an even better present is to teach them how to ensure it is at the best rate to encourage them on the path to being money-savvy. Sadly children’s savings are not immune from the dire savings rates available right now. Check the rate — many children’s accounts pay less than a dismal 1 per cent — yet you can boost that with not too much work.

The top paying accounts
Pay in £10-£100 a month and Halifax Kids’ Regular Saver pays 6 per cent fixed AER for a year (not available in Scotland), provided you make no withdrawals. The interest rate is fixed when you open the account and is paid on maturity after 12 months, so make sure you move it then to keep the rate high.
If you have a lump sum and you want to lock it away in your kid’s name, then Halifax Kids’ Fixed Saver pays 2.25-3.2 per cent AER fixed for one to five years, with a minimum deposit of £500. Withdrawals aren’t allowed.
If you just want the best paying standard savings where your children can withdraw money whenever they want, Virgin’s Little Rock account pays 3 per cent AER from as little as a pound. The rate’s variable so give your kids the job of rate monitoring (if they are not old enough, you will need to do it) and finding the best if this one drops. See www.moneysavingexpert.com/childrenssavings.
For all these accounts, the account holder must be under 16, and be accompanied by an adult when opening the account. To ensure the interest is paid without tax, fill in an R85 form at hmrc.gov.uk/forms/r85.pdf — the bank should give you one of these.

The top paying junior ISA and child trust funds
Under-18s born before 1 September 2002 or from 3 January 2011 can save £3,600 a year each year tax free in junior ISAs. The current top payer is Coventry Building Society, giving a variable 3.25 per cent AER.
You can also choose to invest the money in various stock market funds in the hope of greater growth, but at greater risk. Other under-18s who were born outside of these dates don’t have access to junior ISAs, but should still have the child trust funds they opened with the Government’s £250 voucher.
Again, like junior ISAs, you can choose to save or invest £3,600 each tax year in these. You are only allowed to hold one, so if you have already got one, check the rate. If it is poor, you have a right to transfer it (ask the new provider to move it for you — you can’t withdraw the cash).
The best paying child trust fund savings account right now is with Furness Building Society at 3.05 per cent AER. With both these types of savings, the money is locked away until your child is 18.

Children’s saving v junior ISAs – which wins?
The big sell of junior ISAs is that they are tax free. Yet as kids are taxed just like adults, it means unless they earn over £8,105 a year, they don’t pay tax. So — stage school prima donnas excepted — that means a junior Isa’s benefits are limited.
Therefore for most people when choosing a version of children’s savings, focus on the highest interest rate, regardless of whether it is a children’s savings account or a junior ISA. However, there are two exceptions:
1) If money is a gift from parents and earns £100 or more a year interest in children’s savings, then it is taxed at the parent’s tax rate. This could be expensive, in which case putting it in a junior ISA where it is always tax-free is a gain.
2) At 18, junior ISAs turn into normal ISAs, so if your child will have big savings then, more than enough to fill an adult cash ISA (£5,640), then putting it in a junior ISA now means it will stay tax-free then.

Are you saving for their ‘university fund’?
When you save in your child’s name, it is their money, not yours. For example, if you have saved money for them to go to university in their junior ISA, at the age of 18 they can choose to spend it on a fast car. You can’t stop them. So if you really want to save for their future in a way which means you are in control, it is best to keep it in your own name, although then you risk paying tax on it.

It is also important for me to throw up a big red flag about paying your children’s tuition fees upfront. Often this is a monumental waste of money and can risk throwing away £10,000s a year. Students only repay fees if they earn above £21,000, and even then they only repay 9 per cent of that. This means all barring high-earners won’t end up repaying the fees in full within the 30 years before it wipes. So they may end up not benefitting at all from you paying off the loan.
If you do want to save up for them, a mortgage deposit or lump sum for a car is often a better idea, as these are more expensive debts that will need repaying regardless. See www.moneysavingexpert.com/paytuition

Last updated: 9:54am, November 15 2012