The ‘pocket money economy’: How an income in early life can increase your children’s financial skills

13th June 2018

Could the way you give your children pocket money improve their money-handling skills and better prepare them for the challenges of adult life?

It could certainly help them to develop strong saving habits, with research from Santander showing that 84% of children who receive pocket money prefer to save it for the future.

But, how can you help them to make sure that they are saving in the best way?

There are two key factors to effective childhood savings:

  • The types of account used
  • The age and aims of the child

There are a wide variety of saving accounts for under-18s, but it is the way they are used which will determine how much your child benefits from them. Some accounts have great advantages, such as tax relief, but come with age and deposit restrictions. That means that you will need to create a strategy which makes use of them at the right time in your child’s life.

Saving accounts for children

The accounts available for children’s savings include:

  • Child Trust Fund / Junior ISA: If your child was born between September 2002 and January 2011, they may have qualified for a Child Trust Fund. This is a long-term savings account which offers the opportunity for under-18s to deposit up to £4,260 each year, tax-efficiently. Parents and grandparents can contribute to this.Child Trust Funds are no longer available but those children who had them can continue to save in their account until they turn 18. However, those born after January 2011, when the scheme was cancelled, will have to turn to a Junior ISA (Individual Savings Account).

    Junior ISAs offer similar benefits, with an annual deposit limit of £4,260.

  • Regular Saving Accounts: These require a minimum deposit each month and often come with limitations on withdrawals. However, these accounts may offer more competitive interest rates to encourage long-term savings.
  • Instant Access Accounts: A more flexible option, with the ability to make withdrawals without incurring penalties or facing limitations. These accounts are likely to have lower interest rates than Regular Savings Accounts.
  • Help to Buy ISA: A government-backed savings account which is designed for first-time buyers to save toward their deposit. This account is available from the age of 16 and offers a 25% bonus on your child’s annual contributions. However, there are limits as to how much can be put into the account each month. During the first month, it is possible to put up to £1,200 into the account. After this, a monthly limit of £200 applies.

Help to Buy ISAs are like Lifetime ISAs, which are available for over-18s. It is possible to open a Lifetime ISA and transfer any Help to Buy ISA savings in, without affecting the annual deposit limit.

Why encourage children to save?

The earlier you begin to teach children about money, the better their understanding of it will be as they grow up. Unfortunately, the financial education provided by schools is lacking, or non-existent and our kids are not leaving school as financially savvy as perhaps we would hope. Research from The Halifax shows some worrying trends among children aged eight to 15, including:

  • Believing that a loaf of bread costs an average of £15, with a pint of milk at £17
  • Estimating the average income for a teacher is £110,000; £87,000 more than the actual starting salary
  • Expecting to retire at 56, 12 years prior to their current projected State Pension Age, which could be later by the time they reach retirement

Of course, we can’t expect children and young teens to understand everything about money and managing a budget, but it is never too early to start instilling some valuable life lessons – and it doesn’t have to be boring, either!

Making saving interesting

If your child is still of an age where they want to do everything with you, make the most of the opportunity to involve them in the household budgeting or have them assist with the weekly shop. This will help them to see how much adults really spend on bills and food and to understand the financial demands they will face in later life.

Saving is always easier when there’s an end goal. Start with something which will take a relatively short amount of time and have your child calculate how much they will need to save each week/month to afford it, then work with them each week to show them their progress toward their goal. The goal can then grow gradually, as they get older, and is likely to teach them both how savings work, and give them a frame of reference for saving for bigger things; which will eventually include a housing deposit and retirement.

It is also important for children to understand the practical side of saving; this includes the options available to them and learning how interest rates work, in terms of both saving and borrowing.

For more information and help with introducing your children to the world of saving, why not bring them to your next appointment with us?