Most of us will face expenses in later life such as university, new car, wedding and first home. If you can afford to start saving for your children, a nest egg in later life can be a huge benefit. Saving just £30 a month for 18 years at an interest rate of 4.5% will amount to almost £10,000.
Bank and Building Society Accounts
Most banks and building societies offer savings accounts specifically designed for children. These savings accounts are open to children of a certain age ranging from birth to 24 years. The interest paid on these savings accounts is often higher than that paid on standard accounts.
Some children’s savings accounts have restrictions as to how many withdrawals can be made without losing interest. How you can access your savings depends on which account you choose. Some may not require notice to be given to withdraw cash; they may be branch-based savings accounts or come with a passbook or cash card.
Some providers also offer regular savings accounts for children that come with restrictions on the maximum and minimum amounts that can be invested each month. They usually have a restriction on the number of withdrawals, which if exceeded can mean a dramatic drop in the rate of interest paid or even that the savings account has to be closed. A certain number of monthly payments also have to be made into these savings accounts each year to prevent loss of interest or closure.
Tax on children’s accounts
Interest on savings is usually taxed at 20% before it is paid. However, children also have a personal tax allowance which stands at £5,035 for the 2006-07-tax year. When opening an account for your children, you can complete a Form R85 for each account to receive interest without tax deducted. Young people aged 16 or over complete this form themselves.
Obviously there is no limit to the amount that you can invest for your children, but be aware that the interest may be taxed if they are under 18 and are unmarried. Parents and step-parents each have a £100 limit on interest earned. This means that if money given produces interest of more than £100 a year, that interest is treated as the income of the parent who gave the money. However, each parent has a £100 limit, so you can receive interest of £200 a year without having to pay tax.
Grandparents or friends and other relatives can give as much money as they like without interest being taxed as their income. Inheritance tax exemptions may mean that tax will not have to be paid on cash gifts given to children but if the provider dies within seven years this may change.
Child Trust Funds
The Child Trust Fund (CTF) is a Government savings scheme that came into effect on 6 April 2005, for children receiving Child Benefit who were born on or after 1 September 2002. Under the initiative the Government provides a minimum of £250 in the form of a voucher, to be presented to one of the Child Trust Fund providers to open a tax-free account on behalf of the child.
Parents, grandparents and friends can make additional deposits, up to a maximum of £1,200 each year.
When the child reaches the age of seven, the Government will donate a further sum, currently proposed at a minimum of £250.
At age 16 the child can begin to make decisions about how the money is managed.
No withdrawals are permitted until the child is 18.
Once the child is 18, the CTF will close and the resulting funds will be made available to him/her.
If an account is not opened before the voucher expires (12 months from issue) HM Revenue & Customs will open a stakeholder CTF account.
Children’s Bonus Bonds
With these savings bonds you can invest in your child’s name and all returns are tax-free for children and parent. They can be opened for children under the age of 16 and you can invest £25 to £3000 for a five-year period. The interest paid on these savings bonds is fixed.
Index-linked savings certificates
These are tax-free investments where the rate of interest is guaranteed to increase in line with inflation. £100 to £15,000 can be invested in each issue and terms can be either for three or five years.