How best to save money for your children's education and future - Gareth Shaw

Dear Gareth,

My father passed away earlier this year and I inherited what was left in his estate. I have two children – an 11 year-old son and a 17 year-old daughter.

I want to save some money for their future – for education or to buy a property. What are my options?

Name and address supplied.

Gareth says,

There are plenty of options available to you, but the route you choose will depend on a number of factors – from your attitude to risk, how long you want to save for, how much you have and how much you trust your kids not to blow the lot.

The first place to look is the much cherished individual savings account, or Isa. You can open a Junior Isa for your youngest, and immediately place £9,000 into it in this tax year. In a cash Junior Isa, you’ll earn interest, which will be paid free of income tax. The best in the market, from National Savings and Investments and TSB, pay 3.25 per cent AER, a healthy amount given the record-low Bank of England base rate.

You can choose and stocks and shares Junior Isa, too, which will grow free of income tax, dividend tax and capital gains tax. If you were planning to invest over a long period –perhaps until your 11-year-old was 25, you may achieve better growth in a fund or shares.

Of course, investing puts this money at the risk of loss, in the hope of generating higher rates compared to cash. Ultimately, this will depend on how comfortable you feel with investing and making a decision on which investments to choose.

There are advantages for your eldest child. Not only can you open a Junior Isa for her, from the age of 16 she can open an adult Isa, into which you can save £20,000 a year. At age 16 and 17, she can benefit from both allowances, allowing you to save a total of £29,000 into Isas, although you will find the rates on adult cash Isas are far less generous than for children.

While the money is in a Junior Isa, you’re responsible for managing it. But when your children turn 18, the money is legally theirs, and they can spend it as they see fit.

This is something you need to consider when using Isas to save, and having an open conversation with your children about what your intentions for their savings.

If you wanted to reserve the money for property, you could help your daughter open a lifetime Isa at the age of the 18. You can save up to £4,000 a year into this, and the government will top it up with a 25 per cent bonus, meaning a total saving of £5,000 a year. There are cash options and stocks and shares options, much like with Junior and adult Isas.

The best cash lifetime Isas pay around 1.25 per cent. The savings held in an adult Isa may only be used to buy your first property (worth up to £450,000) or for retirement, with the ability to tax-free withdrawals from the age of 60.

Withdrawals for any other reason will see a 25 per cent penalty applied to the savings (although this has been reduced to 20 per cent as a result of the coronavirus crisis).

If you wanted to ensure that their money is invested for the very long term, you could open a pension for your children. This is something I’ve done for both of my children. You can save up to £2,880 into a pension each year, and the government will top up your contribution with 20 per cent tax relief, seeing a total of £3,600 being invested.

The downside? Your kids won’t be able to get the money until at least the age of 57. If you decide to eschew Isas and pensions, you can open a children’s savings account but a note of caution about tax.

As most children don’t earn a salary, they can receive an awful lot of income from savings without paying tax - £18,500 in the current tax year, made up of the tax-free personal allowance of £12,50; the £5,000 starting savings allowance at 0%; and the £1,000 personal savings allowance.

The catch here is that savings given to a child by a parent or step-parent is taxed at the parent’s tax rate if it generates more than £100 a year in interest.