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With a new financial year under way some working dads will be about household finances. John Ellmore has some advice on ways to save for your family.
April brings a new financial year and an opportunity to think about the household budget.
The cost of bringing up kids is always increasing. And there’s more and more big ticket items to save for like tuition fees for further education or even helping with the deposit for a home.
John Ellmore, director of KnowYourMoney, sets out the best ways to maximise your cash when saving for your kids.
Parenting is undoubtedly a tricky business – this much goes without saying. From the discipline, to the actual cost of raising a child, there is a lot to navigate. However, there is one element that can easily be overlooked. That is, saving for their future.
It may seem daunting to plan so far in advance, but it needn’t be. In fact, there are numerous options available for parents to help give their child a strong financial start in life.
Perhaps unsurprisingly, this form of savings account allows account holder to withdraw money whenever they choose. A parent or legal guardian is able to open an instant account on behalf of a child; in most cases, the child must be under the age of 16, but this age varies, depending on the bank.
Instant access savings accounts a good starting point for parents taking the initial first step towards saving for their child’s future. This is because they allow parents to save at their own pace, so contributions to the savings pot needn’t be regimented. However, the interest paid from these accounts is not particularly high. This means that there is a risk that the money pooled won’t hold its real value against inflation. That said, it is a good option for parents looking to dip their toes into the world of saving.
Also known as fixed rate bonds, these accounts enable parents to earn fixed interest on their savings over a set time frame, usually ranging from one to five years. In terms of setting up this account, the rules are fairly similar to Instant savings accounts; a parent or legal guardian can open an account on behalf of a child under the age of 16 (again, this age can vary depending on the bank.) However, fixed term savings accounts do require both parent and child to practice patience. Neither party is able to add or withdraw money until the specified bond period is over. If they do, they risk losing the rate benefits the bond has achieved.
However, this account is not without its benefits. Account holders do enjoy higher interest rates than the everyday savings account; although rates inevitably vary from bank to bank. Parents should ensure they understand the structure of the interest rate system for the specific bond they choose, as these can also vary. Generally speaking, these accounts are best suited to (patient) parents who are able to invest a lump sum over a long period of time.
In essence, these are tax-free savings accounts, which allow parents to save up to £4,369 per year for their child without having to worry about tax charges. Parents or guardians are able to open a Junior Cash ISA on behalf of their child. All money saved is then locked away until the child reaches the age of 18. These ISAs tend to be low risk, provided it is with a UK-regulated provider, of course.
Once the child is old enough, the money is recognised as their own, and they are able to continue saving or withdraw funds as they choose. However, the lack of accessibility of a Junior Cash ISA poses a potential problem for parents, as, should an emergency arise, they are not able to access the money. Despite this, Junior Cash ISAs are a strong option for financially risk-averse parents looking to make long-term gains on their child’s savings.
For parents willing to be a bit more adventurous, it might be worth considering a Junior Stocks and Shares ISA. The general rules are similar to those of a Junior Cash ISA, in that the money can’t be accessed until the child reaches the age of 18. The key difference, perhaps unsurprisingly is that the money in the ISA is invested into stocks and shares chosen by the parents.
Any profits earned by the investments made is tax free, which is a benefit when stocks are performing well. On the other hand, however, stocks and shares fluctuate, and the value of the investment can go down as well as up. So, it is important that parents understand the potential risks of a Junior Stocks and Shares ISA before applying.
For parents concerned about the long-term financial security of their child, starting a pension pot could be a suitable option. This options enables parents to pay up to £2,880 a year, whilst enjoying 20% tax relief; so they could potentially save up to £3,600 a year for their child.
Although, this savings option is not without its drawbacks. The child will be unable to access their funding until their late 50s at the earliest! This could trip them up financially in adulthood. For example, even if they wanted to buy their first house in their twenties or thirties, they would be unable to dip into their pension to finance the deposit. Whilst a strong long-term savings option, pensions could potentially hold children back from achieving other financial milestones.
Long term-financial planning for a child can be a complex process. Whilst those listed all have their own benefits and drawbacks, it is vital that parents research all options very carefully and have a realistic understanding of how much money they can contribute to their child’s savings. Finally, it is always advisable to seek professional advice to properly understand the different options available.
John Ellmore is Director for Know Your Money. Know Your Money is an independent financial comparison website, launched in 2004. Run by a dedicated team, Know Your Money’s goal is to provide clear, accurate and transparent comparisons for a wide range of financial products, such as business loans, mortgages and car insurance.