21/05/18Giving your kids a head-start in life: Four reasons to get children saving early
Giving your children the best start in life is probably one of your top priorities. And, as a parent, it is up to you to teach them about all aspects of life; from looking after themselves, to taking care of everyday responsibilities. Part of that needs to include learning about finances and generating positive financial habits which will last a lifetime.
Most banks and building societies now offer savings accounts for children and, as a bonus, they often have much higher interest rates than adult savings accounts (source: Which?).
But, why should kids learn about saving in their formative years? Whether it is out of their pocket money, or a portion of any birthday and holiday gifts they might receive, there are several reasons to start them young:
1. To form good habits for later life
Positive attitudes toward money are best learned early in life. It is harder to change the habit of a lifetime than it is to learn the right way to do it from the start. Teaching young children to put some of their money into savings will hopefully lead to them continuing to do so when they have their own income as teenagers and adults.
Having children save toward larger purchases can also help to teach them the value of money. Most toddlers believe that they can buy you a car with a single pound coin, but by letting them choose their own goals and working with them to meet them, they should develop the ability to calculate how much they will realistically need to buy the things they want. Additionally, having to save and wait to buy things will reduce their expectations of receiving things, just because they have asked for them, which is a lesson best learned earlier, rather than when they face the adult world for the first time.
2. To give them a head-start in later life
If you decide not to have your child save toward more immediate purchases, you could have them put money away for the future. This could form a great foundation when they enter the adult world and may even mean that they can learn to drive, buy a car, or put money toward their first house much sooner than they would otherwise be able to do so.
Any money your child puts away for later life now, will benefit from years of added interest and potential growth.
3. To take advantage of age-related savings accounts
There are many types of account which are restricted to certain age groups. These include:
- Children’s savings accounts: There is usually no minimum age for a children’s savings account, though different providers have different options as the child grows. The services offered, including accessibility of cash and interest rates will differ between banks and building societies.
- Junior ISA: In 2011, Child Trust Funds were replaced by Junior ISAs. These can be opened on behalf of anyone under the age of 18, though 16 and 17-year-olds are able to open their own account. Anyone can pay into a Junior ISA, up to the annual allowance. For the 2018/19 tax year, this is £4,260. The money saved into a Junior ISA is held under the child’s name, but they cannot access it until they reach the age of 18. Children who already have a Child Trust Fund must first transfer those funds to a Junior ISA (and close the Child Trust Fund) before contributions can be made to a Junior ISA – or contributions up to £4,260 in 2018/19 can be made to the Child Trust Fund if preferred.
- Help to Buy ISA: Available to anyone aged 16 and over, Help to Buy ISAs are a government-backed individual savings account which provides a 25% bonus on all deposits. Help to Buy ISA account holders can deposit up to £1,000 within the first month of opening the account, followed by a maximum of £200 per month thereafter. Help to Buy ISAs are only available for new savers until November 2019, so they may not be suitable for those with younger children. They are aimed at supporting people buying their first home. Individuals can close their account and access all of their savings, without charge, to go towards their deposit at the point of exchange of contracts on their first home.
- Lifetime ISA: These accounts can be opened by anybody aged 18 to 39. Each year up to the age of 50, account holders can deposit a maximum of £4,000, which will attract a 25% government bonus. This is added to the account each month. The funds, including the government bonus, can be used to help buy a first home worth up to £450,000 at any time from 12 months after first saving into the account or funds can be withdrawn from age 60 tax-free for any purpose. Withdrawals at any time for other purposes can be made but with a 25% government charge applied.
Pensions may not be the first thing you associate with your children’s finances, but there are many pensions available for children, and their families to start paying into from an early age. These are tax-efficient and can result in quite generous returns by the time your child reaches retirement age. For a child with no earnings, the maximum tax efficient contribution that can be made each year is £2,880 which is then increased to £3,600 within the pension plan due to the addition of basic rate tax relief.
Knowing about account types such as these allows your child to plan ahead and get the most out of the options available to them as they grow up. With government bonuses and high interest rates available for limited portions of life, it is worth making sure that they are ready to open accounts as soon as they are able.
For more information and guidance on teaching your children to be financially responsible, feel free to get in touch with us.