The primary reason for opening a savings vehicle for your child is usually to create a nest egg for their future; to put money aside which will help them on their way as they embark on adult life. The general economic troubles of the last few years together with the more acute issues, such as the raising of the tuition fee limit and the recent publication of youth unemployment figures topping 1 million, serve as timely reminders that you never quite know what the future may hold for you children when they reach adulthood. Therefore, any nest egg a child can access when they turn 18 may prove invaluable whether it helps cover their cost of living at university, their self sufficiency when employment is hard to come by or even if it helps them to get onto the property ladder.
It may seem slightly cheeky but, within limits child savings can be used as a means of saving a little bit more for the parents whilst taking advantage of the tax breaks. Obviously the above restrictions are designed to partly negate this and stop parents abusing their childs savings options to circumnavigate tax but there is scope for benefiting up to the aforementioned 100 interest limits per parent. It is always worth remembering though that the money you put into a child savings vehicle does legally belong to the child not the parent (even though the child may not be able to do anything with it without your parental authority).
There are further tax breaks though when adults wish to donate to a childs savings plan. For any sum put aside by a parent or step parent the interest accrued will be tax free up to the limit of 100 per year, so where a child may have two parents and two step parents for example, this limit could even reach 400. Whats more, the limits do not apply to grandparents or any other generous adults so they can donate any amount of money to your child which would then benefit form tax free interest.
Beyond the more obvious financial benefits of opening a savings vehicles for you child it can also provide an excellent opportunity to introduce your offspring to the world of money so that they can be well prepared when the day comes for them to first take control of their own finances.
By getting children involved in the management and monitoring of their own savings you can increase their familiarity with concepts such as banks and interest and introduce them to the ideas that money you/we put into banks will grow and is (for the most part) secure. You can encourage them to understand that, for savings at least, the mechanics can boil down to the idea that we lend our money to the banks who will then pay us in return and that the amount they pay us is described in the interest rate. Once they are familiar with the more basic concepts they can be encouraged to take part in choosing their own accounts based upon criteria such as interest rates, and then monitoring their progress as they go.
There are plenty of reasons why saving for children is a beneficial exercise and maybe the hardest decision youll have is working out which child savings vehicle is most appropriate for you situation, so it is always a good idea to seek out independent financial advice before committing to anything.
Savings accounts for children are often referred to as being tax free which creates the false impression that children do not need to pay any tax at all on their money. In truth there are no differences between the tax children should pay on any money they put aside in savings accounts in comparison to their adult counterparts. In terms of interest, they are subject to the same income tax bands as adults, under which they are not required to pay tax on any income up to 7,475. For most (unemployed!) children this threshold is not likely to come into play but for children who may have extra earnings, parents should be aware.
Parents receive plenty of advice recommending that they consider saving money on behalf of their children, with successive governments also offering incentives in the form of the old tax efficient Child Trust Funds (CTFs) and the new Junior ISAs. The launch of the latter at the start of November has brought the subject back to forefront of many parents minds and it is therefore an opportune time to look at the reasons why it is not only a good idea to save on behalf of your children but to get them involved in the process as well.
Through vehicles such as the Junior ISA (for children born after 3 January 2011 or before 1 September 2002) and the CTF (for children born between those dates) there are additional tax breaks on offer which mirror those of adult ISAs, such as an exemption from income, dividend and capital gains tax, but in turn the funds are locked up until the child reaches 18 as mentioned above.
To that end, savings vehicles such as the CTF or the Junior ISA are designed so that any money put into them will be protected until the child turns 18 in order for the funds to be available when they are most needed.
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