How to Save for Your Child: Junior ISAs, CTFs, and SIPPs

Throughout the UK, only 29% of parents regularly set aside money for their children as part of a savings plan, according to a 2016 survey. The average savings rate is £45 per child for those who are the most diligent, equating to a £550 each year. Nearly 21% of parents are not saving at all either because budgets are tight during the month or because they have a minimal understanding of ways to save for the long term.

For parents who recognise the importance of saving for their children, whether for university expenses in the future or long-term savings to kick start retirement funds, there are a handful of methods to use that offer both immediate and long-term advantages. Understanding the options through Junior ISAs, Child Trust Funds, and SIPPs can empower parents to find savings each month to help give their children a financially sound start to their adult lives.

Breaking Down Junior ISAs

Created in 2011, Junior ISAs, or Junior Individual Savings Accounts, are one of the most common ways parents are able to set aside money for their children. With a Junior ISA, up to £4,260 can be saved each year, per child, and these funds can come from parents or immediate family members. When the child turns 18, however, the account is transferred to his or her hands, meaning they can use the savings as they see fit.

Junior ISAs can be a smart way to save for minor children because the funds put away in the account are tax-free, not only year to year but when they are taken out by the child when they become an adult. Additionally, Junior ISAs offer another indirect opportunity for parents. According to a finance specialist with MoneyPug, saving in a Junior ISA allows parents to gradually teach their children about money and the benefits of long-term savings. When this is done throughout a child’s lifetime, the money that falls into the hands of the child when he or she turns 18 is more likely to be used responsibly, like helping pay for university expenses or buying their first property.

Parents also have the option to save within a Junior ISA through a fixed-rate option that works similarly to a personal ISA, or through a shares wrapper that allows for investments. It can be helpful to use an ISA comparison site to review the various options for fixed-rate and investment Junior ISAs from leading financial institutions and investment firms. This kind of resource makes it easier for parents to understand Junior ISA minimum opening deposits, regular contribution requirements, and the amount of interest or dividend earnings they can accumulate over time.

The Difference of Child Trust Funds

Child Trust Funds, or CTFs, are another way parents can set aside money for their children now. Like Junior ISAs, CTFs allow for up to £4,260 in savings each year, on a tax-free basis. However, only certain children have CTFs, as these accounts were available only to those born between 1 September 2002 and 2 January 2011. These accounts were established by the government, with some initially funded up to £250. If children born in this date range did not receive a CTF, a Junior ISA is still available. Additionally, any CTF can be transferred to a Junior ISA should that provide more options for interest or investment gains over time.

The same rings true with CTF as it does for Junior ISAs – the money saved is automatically transferred to the child when he or she turns 18. This, again, makes it important to educate children on the power of savings and the importance of financial responsibility before they receive these funds.

Long-term Savings with SIPPs

Yet another option for starting your child on a financially sound footing is a SIPP, or self invested personal pension. Many do not think of retirement savings as a need for children under the age of 18, but parents can help set children off on the right path by establishing a SIPP for a minor child early on in life. A SIPP allows parents to set aside up to £2,880 per year for non-earning children, and tax relief of up to 20% is available, making the total contribution £3,600. Investments in these types of accounts are free from taxes, and the money can be put into an investment scheme that offers potential interest and dividend returns over time.

The benefit of investing in a Junior SIPP is the long-term, tax-free savings it offers to children, specifically for funding their retirement. These funds cannot be accessed until the child is 55, so while this may not be helpful for university costs, it does make a tremendous difference in creating a retirement picture that is more optimistic.

The savings options available to parents in the UK may seem complicated on the surface, but once you have an understanding, they can be powerful tools for achieving financial stability later in life. Junior ISAs, CTFs, and Junior SIPPs have similar benefits from a tax perspective, but knowing which one is right for you or your child takes recognising the timeframe for each account and the outcome you intend to achieve.