Are parents saving more for their kids than themselves?

Parents are putting away £750 a year for each child

As part of our savings research with our sister site, Smart Money People, we asked parents some questions about saving for their children.

Here’s what they told us… 

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How much money do kids have? 

We asked savers how much their children had in their accounts and it averaged £4,001 per child. This is a significant amount, and when stashed in the top paying easy-access account would be earning almost £210 a year in interest.  

By comparison, parents typically have £6,251 saved for themselves, which for nearly half (47%) is their rainy day fund. However, based on the average two-child family, it means parents have set aside over £8,000 for their children – 28% more than their own pot.

So, yes, it seems like some parents have built up a bigger savings pot for their kids compared to themselves.

The savings set-up

Almost two in three parents (65%) have set up a savings account for their children. And, perhaps unsurprisingly, the task has not been shared equally between parents; more mums (71%) have opened accounts for their kids than dads (60%).

And how much are they saving each year? Our research suggests the average parent is saving £2,251 a year for themselves – which is fair enough, given the financial responsibilities of having a family. 

Meanwhile they’re putting away £750 a year for each of their offspring, so £1,400 based on the average two-child family.

Should I start saving for my children?

If you can, it’s a great idea. If you start early, you’ll have years to make the most of compounding, which is where your interest starts earning interest, helping your money to grow. 

It also provides a great opportunity to have conversations with your children about money and help them understand the value of saving for the things they want.

I still remember getting really excited popping along to Nationwide with my dad and my paying-in book and seeing the balance grow in my first savings account (the name had something to do with squirrels, I think).  

And squirrel away I did! Whenever I got money for birthdays and Christmas from my grandparents, in my savings account it would go!

You don’t have to deposit huge sums, either. Setting £10 a month aside for your newborn baby in an account paying 5% interest would total almost £3,517 by the time they’re 18. 

Investing is another option, as is setting up a pension for your child, which we’ll save for another article. 

Do I have to pay tax on my children’s savings?

One in five parents (20%) aren’t sure if they have to pay tax on their kids’ savings.

Like adults, children have a personal tax allowance. They can earn £12,570 before paying tax and if this income is savings interest they’d also be entitled to the £5,000 starting savings allowance and a £1,000 personal savings allowance. So that’s a total of £18,570 this tax year.

But the rules are different when parents pay into their childrens’ account. 

Tax may be due if your child earns more than £100 in interest on money given by you or their other parent in a tax year.

If you go above the threshold, you’ll have to pay tax on all the interest if you’ve exceeded your personal saving allowance, at your current tax rate. 

The rules don’t apply to money gifted by grandparents, other relatives or friends. 

It’s also not the case with Junior ISAs (JISAs) and Child Trust Funds which are tax-free. 

Best savings accounts for children

If you want to save for your kids, there are a number of options.

Easy-access accounts offer top rates for large deposits but some are only available to kids above a certain age. 

For example, HSBC’s MySavings pays 5% on savings up to £3,000 and it’s available to children between seven and 17 years old. If your child had the maximum balance, they’d earn £150 with HSBC in a year.

Kent Reliance offers a lower rate of 4.3% on a maximum balance of £25,000 but it’s available to all children under the age of 18.

If you want to save little and often for your offspring, regular savers pay a higher rate albeit on smaller sums. 

Saffron Building Society and Halifax both have regular savers for kids which pay 5.8% and 5.5%, respectively, for 12 months. Both allow a maximum monthly deposit of £100 a month and are available to children under 17. If you managed to pay in £100 a month, your child would earn £37 with Saffron and £35 with Halifax, in a year.

JISAs are another option. You can deposit £4,000 each year and there are two versions – cash and stocks and shares. JISAs are held in the child’s name but anyone can contribute to it. When the child turns 18 they have complete control over the account.

The top cash JISA currently pays 4.95% from Coventry Building Society, and Loughborough Building Society offers 4.8%. If you contributed £4,000 in one tax year, your child would earn £198 with Coventry and £192 with Loughborough. 

See our saving for children best buys, for more information.