Saving and investing for children

Saving and investing for children

From savings accounts to Child Trust Funds (CTFs) and Junior ISAs (JISAs), there is a whole range of savings and investment products for children.

Written by Abigail Montrose on 24 March 2014

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What to consider

When saving and investing for children, first decide if you want to invest a lump sum or a regular amount, how long you want to save or invest for and how much risk you are prepared to take. There are also tax considerations which can influence your choice.

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. For more on how children's savings and investments are taxed see our guide.

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.

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.

NS&I 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. If the bonds are cashed in early there is a penalty equivalent to 90 days interest.

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 or £270 a year in a plan but watch out for charges as these can be high. For more on friendly societies see our guide.

Junior ISAs (JISAs)

JISAs were launched on 1 November 2011 to replace Child Trust Funds (CTFs). Parents can invest up to £3,720 in 2013/14 (rising to £3,840 in 2014-15 and £4,000 on 1 July 2014) in a JISA 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. As with other ISAs, returns are tax-free. Children can invest in a cash and a share JISA at the same time if they want as long as they do not exceed their annual JISA allowance.

Any child under 18 is eligible for the scheme providing they don't have a CTF. For more on JISAs see our guide.

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 2013/4 tax year is £3,720 rising to £3,840 for 2014-15 and £4,000 on 1 July 2014.

You can transfer your CTF to another provider or fund whenever you like. You may want to do this because your investment strategy for your child changes or the CTF is not doing very well. To make the transfer, contact the new CTF provider, complete its CTF transfer form and wait for it to organise the transfer. This should take no more than 30 days. There is a charge for the actual transfer and there also may be costs involved in setting up the new investment such as stamp duty and dealing fees.

It's not currently possible to transfer from a CTF to a JISA. But the government has announced that it will allow transfers to take place from April 2015.

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.

For more on unit trusts, OEICs and investment trusts see our guides.

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.

For help working out how much savings may be worth in the future or how to reach a savings target, use our savings calculator.

Other guides which might interest you

Junior ISAs (JISAs) explained

Are Junior ISAs too good to be ovelooked?

How children's savings and investments are taxed

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