Top ways to contribute to your child's savings

Top ways to add to your child's savings

When it comes to your offspring's future finances, opening a children's savings account is an essential first step. Once you have done so, you can start thinking about the most effective ways to contribute to their nest egg – read our guide to learn more about the top three.

Before you begin

Before you start to look at ways to boost your child's savings account, it is important to understand that there is no single method that is best for everyone. Rather, the most effective ways to contribute to such accounts depend on a number of factors, including – but not limited to – the type of savings product you hold and your individual circumstances.
It is also crucial to consider tax and to note that tax assumptions may change if the law changes and the value of any tax relief will depend upon your personal circumstances. As such, it may be beneficial to speak to an independent tax advisor to learn how best to make efficient contributions to children's savings accounts.

Monthly direct debit

The first way you can contribute to your offspring's savings account is by setting up a monthly direct debit. This is something you can do whether you hold a Junior ISA (JISA), a Bare Trust, a Designated Savings Account or a Child Trust Fund (CTF), for example.

When arranging a direct debit, it is important to first familiarise yourself with any limits on contributions your chosen product might have. Should you hold a JISA or a CTF, this limit is currently set at £3,600 per annum. In April 2013, this will change in line with inflation.

For equity-based savings accounts, making monthly contributions, rather than simply investing a lump sum, has the potential to offer certain advantages in the form of pound cost averaging. This refers to the regular investment of small sums of money over a period of time.

For example, in recent years, the stock market has been volatile and, as a result, it is difficult to pinpoint a potentially opportune moment to invest a lump sum. By regularly contributing smaller amounts over the medium to long term consistently through times when share prices are high and times when share prices are low, you could end up with more shares for your money than if you had invested a lump sum at a single point. However, when considering equity investments it is essential to understand that the value of equities can fall as well as rise, and you may not get back the amount you originally invested.

Lump sum deposits

The next route to consider is making lump sum deposits, which can appeal to those with large sums to invest. This can work well with equity-based savings products which do not feature an annual upper limit.

Making contributions like this has the potential to be an effective way for grandparents to pass on their grandchildren's inheritance – but they should ensure the money will be going into an account with a competitive interest rate to protect against potential losses over the long-term.

Of course, the kind of account held, as well as the personal circumstances of the individuals involved, will have a bearing on how tax-efficient such contributions will be. As such, it is important to speak to a tax advisor to ascertain how best to manage larger investments.

Gifts from friends and family

Another option to consider is monetary gifts from friends or relatives. If your child has an account such as a JISA or CTF, acquaintances and relatives will have the opportunity to make contributions to your child's savings plan – something they might like to do on an ad-hoc basis, such as for the child's birthday, or regularly by setting up a direct debit.

As with the above contribution methods, the value of such gifts can be influenced by interest rates and the type of account – or accounts – you hold, so you may want to regularly assess the most efficient way of receiving this kind of contribution and let potential donors know.

When considering any form of children's savings plan, it is crucial you familiarise yourself with all the key information before proceeding. This includes checking the most recent tax information, as this can frequently change, as well as requesting advice from a professional financial advisor.