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Why now is the time to invest in your child’s future
This summer, the first recipients of the Child Trust Fund (CTF) will be able to access their savings as they turn 18. Yet, out of the 6 million CTFs set up, as many as 1 million are estimated to have been lost, leaving young people at risk of missing out on their savings according to charity Share Centre.
Children born between September 2002 and January 2011 were issued a cash endowment of between £250 and £500, depending on their family’s income, to deposit into a CTF. A second voucher was issued to children who turned seven between 1 September 2009 and 31 July 2010, before the top-up was scrapped by the government. Some could now have as much as £1000 sitting in those accounts, even if no additional funds were added by their family.
Share Centre’s awareness campaign revealed that a sixth of the funds are currently classified as “addressee gone away”, with parents losing track of the funds when they move home. This means that millions of pounds could potentially remain unclaimed.
Parents with children born within the CTF date range can track down the fund via the Government’s website. But, for those whose children did not benefit from a CTA, the news stories are a reminder of the importance of planning for your child’s future.
There are a number of different ways to save on behalf of your child. It’s important to choose the option that best suits your situation, whether that means allowing access to the assets now, at the age of 16 or 18, or even upon retirement.
Children’s easy-access savings accounts
An easy-access savings account offers the option to access the money at any time – though some restrictions may apply. The maximum age to hold an account varies, but can be as high as 20. Some accounts issue passbooks, which allow children to visit a branch and withdraw funds themselves (with a parent present).
Being directly involved in paying in and withdrawing money, as well as having possession of their account statements, can be helpful in teaching children positive financial habits and healthy attitudes towards saving. Though it is important to be aware that interest over £100 a year is taxable and will be added to the parent’s tax bill if it exceeds their personal allowance.
Children’s regular savings accounts
For those looking to save regularly into an account on behalf of their child, regular savings accounts can be a simple way to gradually build up a pot without having to invest a large lump sum. They are often designed for making smaller deposits, with many having a maximum limit of around £100 per month.
Similarly to an instant-access savings account, they are subject to the same £100 limit on tax-free interest. They may also have more stringent withdrawal restrictions.
Launched in 2011 to replace the Child Trust Funds, Junior ISAs, or JISAs, are similar to adult ISAs but available only to those under 18. When the child reaches the age of 18 the account will automatically be turned into an adult ISA and the child will fully manage their own funds. Children do not have access to the money before then, though they can run the account from the age of 16. In the two years between 16 and 18 a child can hold both a junior and adult ISA, which can provide a temporary savings boost.
As with an adult ISA, savings in a JISA are tax-free, but are not subject to the £100 interest rule that applies to bank and building society savings accounts. The maximum deposit per year is £4368 and the money can be kept in cash or split between cash and stocks and shares. With cash ISAs there is no tax to pay on interest earned. Similarly, no tax is due on capital growth with a stocks and shares ISA. In addition, interest rates tend to be higher for JISAs than their adult counterparts.
NS&I premium bonds
National Savings & Investments premium bonds can be purchased on behalf of children in amounts ranging between £25 and £50,000. Every month each £1 bond is entered into a prize draw in which the beneficiary could potentially win anything from £25 to £1million, tax-free. However, there is no interest paid on bonds and there is the possibility of winning nothing. Children can take control of bonds at the age of 16, and money can be paid in by people other than parents, which makes them a good option for grandparents and other family members wishing to save on the child’s behalf.
Stocks and shares
Investments can be held on behalf of your child in a designated account or bare trust. A designated account is treated as yours and taxed accordingly, whereas a bare trust is treated as your child’s for tax purposes. Investing in stocks and shares could potentially see bigger growth than cash savings, though dips in the market could also mean losing money. Losses from investments aren’t always covered by the FSCS, unlike those from savings accounts. Investment portfolios may also be subject to monthly or annual fees, plus management fees – depending on how hands-on you choose to be.
There are a number of different options when setting up a trust for your child, and assets can include everything from money and investments to property and land. A bare trust gives the child the right to the assets when they turn 18. A discretionary trust allows the trustees to decide how and when the assets are divided. Accumulation trusts allow trustees to accumulate income within the trust and add it to the trust capital. An income in possession trust states that the trustee must pass on all trust income to the beneficiary, though the beneficiary does not necessarily have a right to the assets themselves.
Many people are unaware of the potential to take out a pension on behalf of their child. Unlike many other options that see the child gain access to finances at 16 or 18, a pension is a more long-term savings option. Though the child can take control of the pension at 18, they will not have access to the money until the age of 55. Children also get an additional 20% tax relief on contributions, which means if a parent pays in the maximum £2880 per a year, an additional £720 will be added in tax relief bringing the total to £3600. They can also take a 25% tax-free lump sum when they come to draw the pension, although will be subject to income tax beyond that amount.
Putting away even a small amount towards your child’s future can make a big difference, so start saving today. Depending on your circumstances and at what point you wish your child to have access to the savings, there are a number of flexible options available.
The earlier you start to save, the better chance you have of achieving your financial goals and providing significant financial help for your child. Talking to your child about the process and involving them in whatever way you feel appropriate can also help to teach healthy financial planning early on.
Our team at Vintage Wealth Management are highly skilled in providing expert advice on all forms of savings and investment products. Contact us today to discuss the best savings and investment vehicles for you and your child.