Saving for Children: What are your options?
As a parent, you only want the very best for your child. When it comes to saving for their future, it’s natural to have certain goals and aspirations in mind.
Economic studies suggest varying stats for the average cost of bringing up a child in the UK. Some suggest this is around £100,000, but with childcare costs, some experts are saying this could be as high as £250,000.
As a parent, you may be looking to save for your child so they can go to a certain school, university, or so they can buy their first car or home. The earlier you start saving for your child, the better your options will be. However, the success of your savings strategy will be determined by the methods you choose.
Set some clear goals and financial targets
By creating a financial plan when your child is born, you will have a far better chance of achieving your goals. However, it’s never too late to start saving. Review your financials and then decide how much you are willing to save each month. Once you’ve made a financial commitment to save, explore your options and decide on a suitable savings strategy. This could be a high interest bank account or an investment, or it can be a mix of both.
There are different ways to invest and various savings products on the market. In general, returns are governed by the length of time you invest or save, and whether you need access to your money.
Nowadays, there are few high street bank accounts that offer attractive interest rates, which can be as low as 0.25% and rarely above 2%. However, there are various saving accounts which offer higher interest rates than current accounts. As a rule of thumb, the less access you need to your money, and the longer you save, the greater the savings interest you will earn over time.
Easy-access bank accounts tend to have variable and lower interest rates. However, as the name suggests, this type of account gives easy access to money and it can be a good way for your child to learn how to use a bank account.
A regular savings account has higher interest rates, which are usually fixed, but you will have limited access. This type of account usually requires monthly deposits; you may be expected to pay in anything between £10 and £100 each month. There may also be certain terms and conditions, including penalties for missed deposits, so always read the small print carefully.
Firstly, it’s a myth that you need to be wealthy to be able to invest – this simply isn’t true. Investing is all about making the most of the money you have, so you can generate attractive returns. Secondly, whether you’re investing for a newborn or an older child, the tax wrapper you choose will make all the difference.
There is often some confusion around whether children are taxed. Tax rules do apply to children and there are different allowances on savings interest. If your child is earning a certain level of income, they may also qualify for tax – if you’re unsure then speak to a Financial Adviser.
One of the most common types of investment for children is the Junior ISA. You can choose either a cash (high interest rate) or stocks and shares option (high return potential). For 2020-21, you can save £4,368 per year tax-free until your child reaches their 18th birthday (they will have no access to their money until this age)*.
When it comes to investing, you will need to consider your level of risk and term lengths. On the whole, shorter term investments tend to generate lower returns than longer term investments. However, other factors, such as the number of funds, fund management and portfolio diversification, will play an important role too.
Making the most of your money
Some figures from Financial Express Analytics show the previous performance of funds, and potential returns that could be made when investing over a longer time period. For the equivalent price of a satellite television package, a regular monthly deposit over a long period of time could generate significantly different returns.
Figures above show the performance outcome of investing £50 per month for 15 years, using three different investment strategies. Tracking the performance of funds saved in a bank account under the Bank of England Base Rate, the performance of an average investment and the return of investment using Aventur Wealth's own investment strategy.
Before you decide to move your well-earned cash into a bank account or savings scheme, it’s always worthwhile discussing your goals with an Independent Financial Adviser. If you don’t need easy access to your money, then you could consider an investment strategy instead.
Would you like advice on your children’s savings strategy? Our team would be more than happy to talk through your options - get in touch today.
* the figures quoted are based on the firm’s understanding of current HMRC limits and allowance and are subject to change in the future