With enough time, and some luck, even small sums saved on behalf of a child will amount to a tidy fund to be put towards their future.
If you put £25 a month into a savings account paying 2.45% from a child’s birth until they turned 18, they would have £6,775 by the time they reached adulthood, according to savings tracking website SavingsChampion.co.uk.
Alternatively, if you invested £25 a month into a stock market-linked account, and it grew by 4% a year after charges, they would end up with £8,000 when they reached adulthood, according to the investment provider AJ Bell.
“While some of the recent market falls may have put parents off investing for their children, this could be an opportunity to make long-term gains,” says Laura Suter, head of personal finance at AJ Bell.
Be tax efficient
Every child can have up to £9,000 saved into a junior Isa (Jisa) on their behalf each tax year.
There is no capital gains or income tax to pay on these accounts, and you can choose whether to save in cash, stocks and shares, or a mix of both if you wish. The child’s parent or legal guardian can open a Jisa, but anyone is able to contribute to it, such as family friends or relatives.
Children aged 16 or over can apply for an adult cash Isa, and save up to £20,000 in it this tax year.
However, they can’t invest in a stocks and shares Isa until they’re 18. Money saved into a Jisa can be rolled into an adult Isa.
The money is locked away until the child reaches age 18, when they can withdraw it.
The child then automatically becomes the account holder, so if they wish, they can withdraw and spend the lot … whether you like it or not.
Decide on risk
Despite the turmoil over recent months, most experts believe the stock market is the right place to save for a young child. As the money will remain invested for decades, it has time to ride out the market’s highs and lows, and shares typically produce a better return than cash over the long term.
“Over the past 35 years the FTSE 100 has delivered a 3.6% average annual return,” Suter says.
Over the same period, the MSCI World Index – which tracks medium and large companies in more than 20 countries – has delivered 6%. “During this time there have been significant falls and market rebounds,” she adds.
If the money does not need to be used on a particular date, you should be able to sit tight through stock market jitters.
However, if you’re saving for a teenager, for example, with only a handful of years to go before they may need the money, you are better off sticking to the security of cash.
Coventry Building Society pays 2.6% on savings in its cash Jisa, while Tesco Bank pays 2.25% on savings of £1 or more on its cash Jisa.
Anna Bowes, the founder of the website Savings Champion, says: “If you want the child to potentially have access to savings before the age of 18, general children’s savings accounts come in all shapes and sizes, and they pay some of the best rates on the market.”
The age at which a child can make withdrawals varies depending on the provider’s rules. “But being able to make withdrawals about age 11 or 13 is fairly common,” Bowes says.
Regular savings accounts pay some of the best rates. Saffron building society’s Children’s Regular Saver, for example, pays 3.02% a year and allows savings of up to £100 a month.
Elsewhere, easy-access accounts include HSBC’s MySavings, paying 3% on savings up to £3,000, while Virgin Money’s Headstart pays 2.02% with no upper limit.
You can choose from thousands of funds, shares, investment trusts, and bonds, and can usually invest from £25 a month.
Alternatively, providers such as Nutmeg and Wealthify offer just a few investment options, rather than thousands of funds.
For example, with Wealthify, you can choose from five investment options for a Jisa, ranging from cautious to adventurous. These accounts may be appealing if you are new to investing.
If you’re choosing a fund, look for one investing in a wide range of companies and areas, so you don’t have all your eggs in one basket.
Which you choose depends on whether you want to take a more cautious or higher risk approach.
Gavin Haynes, an investment consultant at Fairview Investing, favours multi-asset funds with a focus on companies that make sustainable choices.
He suggests Janus Henderson UK Responsible Income, which invests in a mix of dividend-paying companies and has an annual ongoing charge of 0.85%.
Watch out for charges on managed funds, which can rack up over the years. You may prefer a low-cost fund that tracks global stock markets, such as the Fidelity Index World Fund with charges of just 0.12% a year, suggests Suter.
Start a pension
Saving for your child’s retirement may not be your priority, and they are likely to need the money for other life events before then.
But if you want to, you can give them a head start in retirement by opening a junior Sipp, and anyone can pay into the account.
The maximum you can save on behalf of your child, or for anyone who doesn’t work or pay tax, is £3,600 a year, made up of a £2,880 contribution, and £720 basic rate tax relief.
Under current rules, your child can access their pot when they are 55 (rising to 57 in 2028). Even if you only pay in for a few years, the pot still has many decades to grow in value.
Myron Jobson, a senior personal finance analyst at Interactive Investor, says: “It’s important to remember that a lot can happen before your child reaches retirement. Pension rules can be tinkered with significantly over that period.”
Remember older children
If your child or grandchild is between the ages of 18 and 39, you can save into a lifetime Isa (Lisa) on their behalf. They would need to open the account themselves, but anyone can pay in to it.