I’m in the fortunate position of investing for both my children. I’m also saving diligently for myself in investments and pensions.
I have surplus cash to spread around, and have already maxed out my personal £50,000 Premium Bonds allowance, and also have Income Bonds with NS&I.
If I were to put £50,000 into Premium Bonds for both my children (who are currently under the age of 4), what happens to the prizes? Are they paid into my current account?
Ideally, I wouldn’t want them to have access to the £50,000 when they turn 16 as they already have investments elsewhere. So, would I be free to cash in the bonds when they’re 15?
In sum, I’d be using their Premium Bonds allowances to boost my own chances of winning a big prize, but I want full control over the money.
Helen Kirrane of This is Money replies: Premium Bonds are loved by millions of savers for their lottery-style monthly draw in which two savers win £1million, as well as millions of other cash prizes ranging from £25 to £100,000.
Prizes won in the draw are tax free, unlike with a standard savings account where you need to consider your Personal Savings Allowance – so many wealthier savers turn to Premium Bonds when they have maxed out their Isa and other tax-free allowances.
Our reader is looking to max out Premium Bonds for their children and cash the bonds in before they turn 16 to benefit from the tax-free prizes
Your question presents a moral and ethical quandry. When you start Premium Bonds for your under age 16 child you are acting as the ‘responsible person’ and you can manage their bonds online.
There is technically nothing preventing you from opening bonds for your children, maxing them out and cashing them out before they turn 16 – when they are able to look after the bonds in their own right.
This will be considered morally wrong or unethical by some, but it is not illegal one expert tells me.
It could however make the child’s bonds and any prizes they win invalid as NS&I’s customer’s agreement states the bonds and any prizes they win belong to them.
For expert advice on your situation, we spoke to two financial planning experts, Aaron Banasik, an independent financial adviser at Ascot Lloyds, and Arthur Childs a chartered financial planner at Flying Colours.
Aaron Banasik: Using your children’s Premium Bonds for the benefit of you winning a big prize raises important considerations
Aaron Banasik replies: It’s fantastic that you’re taking such a proactive approach to securing both your own financial future and that of your children.
Balancing your investments across various products, such as Premium Bonds and Income Bonds, while thinking long term is truly admirable.
Your question about using your children’s Premium Bonds for the potential benefit of you winning a big prize raises some important considerations.
When purchasing Premium Bonds for your children, the bonds must be held in their names.
Any prizes won are legally theirs, and the winnings are paid into the bank account you nominate when setting up the account.
Until your children turn 16, you can manage these bonds on their behalf, including cashing them in at any time.
However, it’s essential to note that any money placed in their Premium Bonds account is considered a gift to them. As the responsible adult, you must act in their best interests.
Ethically and morally, it wouldn’t be appropriate to use your children’s Premium Bonds as a means to boost your chances of winning or shelter your funds, as the money ultimately belongs to them.
If retaining full control over the funds is important, there are other, more flexible options to explore.
An NS&I spokesman replies: Our Customer Agreement states that any Bonds bought, and any prizes paid in relation to them belong to the child.
The parent or guardian named on the application is responsible for safe-guarding the funds for the child until they turn 16 at which point it passes to the child.
Arthur Childs replies: It’s great to hear that you have been actively saving for both yourself and your children.
And even better to hear that you have done your homework; already taking full advantage of your personal Premium Bonds allowance, as well as investing in income bonds too.
You are now looking elsewhere to invest, notably into Premium Bonds. Premium Bonds are the UK’s biggest savings product and currently have more than 24million people saving over £127billion in them.
Arthur Childs: Premium Bonds can be held for someone under 16 by parents or guardians
Premium Bonds are very flexible. You can put money into them and take it out at will. The interest paid is tax free and decided by a monthly prize draw.
When you win with Premium Bonds, rather than taking the cash, you can also simply arrange for the money to be reinvested (unless you already hold the maximum £50,000).
They can be held for someone under 16 by parents or guardians and mature once the holder reaches 16.
You say you are looking to hold the bonds in your child’s name to potentially win cash prizes. For that reason, you do not want your children to have access to the money invested.
In this case, if you are the person in charge of the Premium Bonds, you could close the account before they reach the age of 16 to access your money.
Although we would question the morality of this approach.
And as far as any prize money goes, there too, as the nominated person in charge of the account you are free to do as you choose with any winnings.
But remember, prizes above the investment limit of £50,000 must be taken while those below can be reinvested.
It’s also worth being aware that the average return from Premium Bonds tends to be less than the rate of inflation and as a result, the purchasing power of your savings will be eroded over time.
So, it’s worth weighing up whether average winnings will be greater than the loss in purchasing power of your money.
Where else could you save?
Aaron Banasik replies: In your personal circumstances, it’s excellent that you’re already utilizing NS&I products such as Premium Bonds and Income Bonds.
However, have you also considered fully utilizing your Isa allowance? You might be already, but just as a reminder… for the current tax year, you can contribute up to £20,000 into an Isa, protecting the funds from income and capital gains tax.
An additional £20,000 can be added each tax year after 6 April, meaning that within a 12-month period, you could save £40,000, and within two years, £80,000, by utilizing four annual allowances.
This approach enables you to retain full control over the funds while still earmarking them for your children’s future, ensuring flexibility in how and when the money is accessed.
If your goal is to save specifically for your children, you could consider contributing to a Junior Isa).
The annual allowance for a Junior Isa is £9,000 per child per tax year.
Funds within a Jisa grow tax-free but belong to the child and become accessible to them when they turn 18.
Opening a pension for your children is another forward-thinking strategy. You can contribute up to £2,880 per child annually, and the government will top this up with tax relief to a total of £3,600.
These funds remain locked away until at least age 57, making this a long-term option to ensure financial security later in their lives.
If maintaining control over the funds until a later date is a priority, you could explore setting up a trust for your children.
A trust allows you to decide when and how the funds are passed down and accessed by your children.
However, it’s important to note that placing money into a trust is considered a gift, so you would relinquish personal ownership of the funds.
Setting up a trust involves legal paperwork and may have associated costs, but it offers peace of mind knowing the money is secure and managed according to your wishes.
It’s worth speaking to an independent financial adviser to explore the best type of trust for your situation and ensure it meets your family’s needs.
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