One of the things you can’t start doing early enough is to teach your children the importance of saving money, and the value of money in general. But the old adage of putting your money into the bank and watching it grow has been smashed to smithereens by the awful rates of interest generally on offer these days. You obviously don’t want to overcomplicate things, especially if you children are particular young, and there are some good deals out there in terms of generating interest. But there are also a lot of bad ones too, so it makes sense to put a bit of thought into it as a team.
Tax on children’s savings
It’s a common myth that children aren’t taxed on savings. In actual fact, they face the same rules as any adult in that they have an annual Personal Allowance (£15,600), and pay tax on any savings thereafter. Of course, most children won’t be working though, and thus are unlikely to reach this threshold, hence shouldn’t owe any tax by the end of the year.
But that’s not to say that HMRC won’t deduct the tax automatically! To prevent them from doing so, be sure to fill out a R85 form (which you can get from your bank). Or if the tax has already been erroneously deducted, fill out a R40 form in order to get it back.
Are Junior ISAs the way to go?
It’s no secret that the returns on ordinary Cash ISAs have plummeted in recent years, and aren’t a particularly attractive proposition for most of us. Rates of return tend to be better for Junior Cash ISAs though, and it can thus be a tempting place to start. However, there are a couple of things to consider. Firstly, the money is locked away until your child turns 18. Secondly, the annual ISA allowance for a child (£4,080) doesn’t carry over if it is unused. And thirdly, the main benefit of an ISA is its tax efficiency – but most children wouldn’t pay tax anyway.
That’s not to say Junior ISAs are a no go. They offer flexibility in that trust funds can be converted into this type of account, while the choice to invest in Stocks and Shares through the ISA is something that may be suitable. There is no right or wrong answer, it’s just a case of what works best for you and your child(ren).
Putting the savings plan into action
It’s really important that your child is hands-on with the process so that they feel invested in the quest to maximise their savings. Start from the beginning, and explain to them why just putting their money in a piggy bank isn’t the way to go, and the importance of interest. Then sit down together, and compare different rates being offered by the different banks or building societies.
Once you’ve made your decision, give them the responsibility of checking the rates each month. If you’ve chosen an easy-access account, it may be worth moving if the rate is better elsewhere. Also discuss with them how best to divide up their pocket money. How much do they want to put towards saving each month? To incentivise them, you could offer to match whatever they save with an additional handout, thus not only boosting their savings kitty, but further drumming home the benefits of putting money away for a rainy day.
It’s all part of laying the right groundwork from an early age, and ingraining the best possible habits. Things are already so different for the youngest generation, while mobile phones, iPads, flat screen TVs
and the rest becoming the norm, and in an increasingly materialistic society, the value and understanding of money can so easily be lost. Putting the pennies away, and in the savviest way possible, is a good first step to ensuring that your child keeps their feet on the ground, and that they secure their long-term financial future from a young age as a result.
Thank you to Lending Works for partnering with Sorry About The Mess.