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Investing in your Child’s Future
For both parents and grandparents, there are a number of ways to start savings for descendants from the earliest days of their lives. Putting money away is a great way to help them to achieve goals later in life, such as buying their first home or paying for university education. It’s also a good way to teach healthy financial habits from a young age.
There are several options available and the right one for you will depend on a number of key factors. This includes who you’re saving for and how much money you can comfortably commit to putting away.
Many of our clients favour the Junior ISA (JISA) as a savings vehicle because of its attractive benefits including tax-free savings, high interest rates and generous allowance of up to £9000 (for the 2021/22 tax year). To put this in perspective, if you’re investing for a little one born this year, by the time the child turns 18 they could have had £162,000 invested for them.
Accounts are available for those under the age of 18. They must be opened by a parent or legal guardian after which anyone can contribute.
There are two types of JISA available. You can choose to open one or both (the £9000 allowance can be used entirely on one option or split between the two). When the child reaches the age of 18, the JISA automatically rolls into an ISA which they can manage themselves.
With the cash Junior ISA, all savings and interest are tax-free. For the stocks and shares Junior ISA, your cash is invested and you will not pay tax on any capital growth or dividends you receive. If you’re putting money away with an investment outlook, the latter option will usually be more suitable as it offers good long-term potential for good returns.
You can also take a strategic approach and consider moving towards lower-risk assets as the child approaches the age of 18, in order to protect your gains. Some platforms allow you to invest monthly with no dealing charges so it’s important to do your research or speak to an adviser before choosing your JISA.
Another benefit of the JISA is that it can be used as a vehicle for ‘gifting’ in order to avoid IHT liability. If you have recently retired, you can use your £3000 tax-free gifting allowance to buy a JISA and help your dependents to build their first savings.
Children’s savings accounts are a great hands-on option to teach young people about money from an early age. With easy-access savings accounts, the account owner can (usually) withdraw funds whenever they wish. Some accounts provide children with passbooks to help them understand how to manage their savings. Tax will be due on savings interest, however, so this may not be the best option depending on your goals.
Regular children’s savings accounts are also popular if you are prepared to commit to monthly contributions. There are good interest rates available (if you shop around) although these accounts do restrict both the number of withdrawals you can make and the amount of money you can invest.
Saving into a Pension
For those thinking to save with a long-term approach, there is the option to take out a pension on behalf of your child. This approach is based on the valuable yet simple concept that the longer an investment has the opportunity to grow, the greater the benefit due to the effect of undisturbed compound growth.
Children can have a pension fund as soon as they are born for immediate access to great tax benefits. They will get basic-rate (20%) tax relief on all contributions; this means £720 added to the pot every year for those who contribute the maximum £2880 annual allowance. They’ll also get a 25% tax-free lump sum when they come to draw the pension.
Your child’s pensions can grow in a tax-beneficial environment and anyone can pay into the fund on their behalf. The child won’t be able to access the funds until they reach pension age, which means the money will be protected. It will also ease the pressure when they start to think retirement planning. Once they turn 18, the child can take over management of the account and continue to make pension contributions. This is a valuable way to encourage good financial habits through affirmative action.
Teaching Children the Value of Money
It’s never too early to teach children the value of money. Starting a JISA, opening a pension fund or setting up a savings account are all great ways to encourage good financial literacy from the outset. Maintaining a healthy dialogue about money will also help them towards a strong financial future. Give our advisers a call today to find out more about your options.