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Saving for your children's future

Saving for children involves putting money aside for their future. Opening a children’s savings account is one way you can help give your child a head start.

Reasons to start saving for your child

Wouldn’t it be great if you could help pay for driving lessons and a first car? Or perhaps your dream is to help your child get on the property ladder?

It really doesn’t matter what you’re saving for. What counts is, by putting some money aside on a regular basis, you’re giving them more options. And if they’re still in nappies, now could be the perfect time to start saving for the big milestones. 

The sooner you start saving, the sooner you start earning interest on the interest you earn. This is known as compound interest – something which effectively turns time into money.

With compound interest, it’s all about having time on your side. And time is a huge advantage when it comes to children’s savings – the longer your children’s savings are in place, the bigger they will get.

We’re not talking about saving half your income each month. Just putting aside as much as you can and making regular contributions can make a big difference. Small amounts soon add up.

Here’s an example for you:

If you made an initial deposit of £1,000 and added £100 a month, after 21 years your net contributions would be £26,200.

When you add in a return of, let’s say, 3.0% – compounded monthly, this means you’d earn £10,721.54 in interest, taking your total savings to £36,921.54.

What is a children's savings account?

A children's savings account is a type of savings account that can only be opened by, or on behalf of, a child under the age of 18.

You might want to open one children’s account for your child to put their pocket money into, and another for you to pay in any larger amounts. They usually pay a slightly better interest rate compared to adult savings accounts.

Keep in mind – if the account is in your child's name, it's your child's money. 

Many accounts allow the adult to stay in control of the money until the child turns 16 (or 18, if it’s a Child Trust Fund or Junior ISA). Once they reach this age, the money is theirs to do with whatever they want. 

A Child Trust Fund is a savings account for children born between 1 September 2002 and 2 January 2011. They’ve since been replaced by Junior ISAs. HSBC don’t currently offer Junior ISAs, but you can find out more about them at MoneyHelper.

Are children's savings accounts tax free?

You might not realise it, but children have tax allowances too. So, it makes sense to take advantage of them if you can. 

There’s usually no tax to pay on children’s accounts. That’s because the interest earned is usually below the child’s tax allowances. However, special rules apply for money given by parents.

If you give your child money that earns more than £100 in interest in a tax year, you may have to pay tax on all the interest. This depends on your personal circumstances, including any tax allowances you may have available. Gifts from grandparents, aunts, uncles, and friends don’t count towards this £100 limit.

An alternative would be to open a tax-free junior ISA. You can save up to £9,000 for each child in the current tax year. When they turn 18, the account can be turned into an adult cash ISA or stocks & shares ISA

With both types of ISA, they’ll never have to pay income tax. And with a stocks & shares ISA, they won’t be liable for UK capital gains tax either on the income or growth. This could be ideal if the plan is for your child to have a lot of savings by their 18th birthday.

As with all things tax-related – the value of the benefits to you will depend on your circumstances, and tax rules could change in the future. To find out more about tax on children’s savings, visit GOV.UK.

How does inflation affect your savings?

When considering your long-term savings options, there’s a hidden risk you need to be aware of – inflation. Inflation is when money loses value as things become more expensive over time.

As the months and years roll by, inflation will reduce the total value of your children’s cash savings because you’ll be able to buy less with the money.

Let's say inflation averages 5% over the next few years. What costs you £1,000 today would cost you £1,276.28 in 5 years’ time.

If you put £1,000 in a child’s savings account today paying 3% interest, you’d end up with £1,161.62 over the same period. So, you'd effectively lose £114.66 in real purchasing power.

Should you start investing for your child?

As you have time on your side, investing could be a great way to potentially beat inflation. Of course, the thing to remember about investing is there are no guarantees, and you may not get back what you put in.

Find out more on our new to investing page. And to see how much you might need to invest to cover the cost of your children's education, try our children's education calculator.

Explore: Is now a good time to invest?