Whatever hopes and dreams you have for the children or grandchildren, it’s reassuring to know that you can help make them happen by setting your child or grandchild on the path to financial security when they are young.
Whether you want to help them buy their first car, contribute to their first home or even set them up for a comfortable retirement, knowing how to make the most of the child-friendly savings vehicles available to you can make the journey much easier.
Forget fairy-tales, here are all the facts you need when it comes to saving and investing for your child or grandchild.
Children have Time on Their Side when Investing
The beauty of investing for a child is that they have time on their side and that means that if you start them investing when they are young, their investments also have all the time they need to grow as well.
The figures consistently show that for medium to long-term investors, the stock market will get your money working harder. And that’s especially so if you reinvest the dividends you earn along the way.
Take an 18-year-old today whose parents or grandparents made a one-off £1,000 investment when they were born. If that was invested in the FTSE All-Share, with standard charges applied that would now be worth £2,259. Please remember past performance is not a reliable indicator of future returns.
And just £50 a month from birth invested in the same way would have turned their total £10,800 investment over 18 years into £15,780 by the time the child reached adulthood.
Junior ISAs (JISA), which replaced Child Trust Funds in 2011, have proved to be increasingly popular among parents and grandparents wanting to kick-start their children’s saving habit. According to the latest figures from HMRC, some 907,000 Junior ISAs were opened in the 2017-18 tax year; more than three times the 296,000 opened in 2012.
They have been available since 1 November 2011 to children under the age of 18 who do not hold a Child Trust Fund account (available to eligible children born on or between 1 September 2002 and 2 January 2011).
And they are popular for good reason. Whether you want them to have a pot of money for university, to put towards their first home or to help pay for their wedding, a Junior ISA (JISA) is an ideal way to start them on the path to being a smart saver.
Designed for children, it’s a flexible and tax-efficient way to help them save with no income or capital gains tax payable on any returns.
Currently every eligible child in the UK under the age of 16 has an annual Junior ISA allowance of £9,000 a year which their parents, grandparents and friends and family can save into. The money can be saved in a cash ISA or invested in a stocks and shares ISA. Or both.
A Junior ISA is unlike an adult ISA, in that, if you wanted to, you could open an ISA with a different provider every year, potentially leaving you with the task of managing multiple ISA accounts. A child can only have one Junior ISA in their name.
The money invested in a Junior ISA cannot be accessed until a child reaches the age of 18, at which point the money will become theirs. Up until that point an adult, usually a parent, will act as trustee.
That is not as formal as it sounds though and doesn’t come with any additional responsibilities, other than handling paperwork or the online account linked to the Junior ISA.
The beauty of a Junior ISA, aside from the tax-efficiency it offers, and the fact that the money is locked away out of temptation’s reach, is that anyone can contribute to a child’s Junior ISA.
So, as well as you being able to save into the Junior ISA for your child, friends and family can contribute too. Christmas and birthday money can all be added over the years, as long as the total amount saved in any year is within the annual tax-free limit.
Children's Stocks and Shares ISA
Children can open a cash as well as a stocks and shares account and according to the latest figures from HMRC, of the £902 million that was subscribed to Junior ISA accounts in 2017-18, around 57% was in cash.
However, given the time-scale and the better potential returns for stock market investments to beat cash over the long-term, investments are better channeled into a stock market invested Junior ISA.
The ability to grow their savings, free from tax is the reason why Junior ISAs are a great way to save for a child’s future.
Contrary to popular belief, children are liable for income tax, although few are fortunate enough to earn enough on their savings and investments to actually pay any.
So if you invest outside an ISA there will be tax to pay by your child if they earn above their personal allowance. The basic personal allowance is currently £12,500, so there won’t be any tax to pay as long as all the interest they earn does not come to more than £12,500 in the current tax year.
As a parent it is also worth bearing in mind that the rules are tougher still if the interest is earned on money given by you. If your child earns more than £100 in interest in any tax year from money you have given them, then you will find that you are personally liable for tax on the interest earned, if it’s above your personal allowance, which is just like your child’s £12,500 in the current tax year In which case you will pay tax on it at the basic rate, higher or top rate of tax, whichever applies to you.
The good news for grandparents, aunts, uncles, godparents and anyone else who gives money to a child, is that the same tax liability does not apply.
And of course, this only applies outside an ISA. If you invest within an ISA for your child or grandchild you do not have to worry about tax, and can let the ISA pot grow, in the knowledge that your child or grandchild won’t pay a penny of tax on money earned within their Junior ISA.
Convert to Regular ISA
When your child reaches the age of 18, the Junior ISA is automatically converted into a regular ISA, so your now fully-fledged adult son or daughter can take control and access the money or continue saving tax-efficiently for whatever they may need – whether that is a car, the deposit for their first home or the money for more day-to-day expenses, such as living costs at university.
One less widely-known perk of holding a Junior ISA is that between the ages of 16 and 18 your teenage child can also open a regular cash ISA and contribute to that, in addition to whatever has been added to their Junior ISA over those two years.
That gives them the unique ability to save an additional £20,000 in the 2020/21 tax year; giving them a bigger tax-free savings allowance than any other group - with a total allowance of £29,000.
The thought of your newly-fledged adult child running off into the sunset at the age of 18 with potentially tens or even hundreds of thousands of pounds in their pocket, is enough to bring every parent out in a cold sweat.
What if all those years of saving and investing end up getting blown on a motorbike/a year out/something totally inappropriate and not the educational/property buying/training purposes you’ve had them earmarked for in your mind for the past 18 or so years?
If you have a willful 18-year-old on your hands, then you might find yourself fighting a losing battle. So if you want to pre-empt that and retain some control over what the money is spent on, then saving into your own ISA and ear-marking it for your child’s future, is a good idea.
£20,000 ISA Annual Allowance
With a £20,000 annual allowance in the current tax year, that’s a tidy sum you can accrue and have at your disposal when it comes to helping out with university costs, as a step-up onto the property ladder, or just being able to step in when they come tapping (as they invariably will) at the doors of the Bank of Mum & Dad.
Retaining some flexibility by also investing in your ISA means you can save tax-efficiently for other pre-18 child costs too that might come up, such as school fees, driving lessons and so on.
Each eligible adult can save up to £20,000 so two parents can save efficiently and build up a substantial sum to cover costs that may come along. And if there’s any money left over, you might even be able to treat yourselves. Win win!
Making a point of talking about your child’s savings and investments with them from as early an age as you can, getting them involved and showing them how it’s growing nicely over the years is a good way to instill a savings habit in them that will, hopefully, pay off.
Encouraging them to do this with a specific goal in mind is a great way to incentivise saving. And what better incentive than saving for their first car, first property or whatever else they have on their ‘most wanted’ list.
Encourage your child to start saving into an ISA as soon as early as possible. The longer they have to save, the longer their money has to grow.
Opting to invest a regular monthly sum makes saving achievable for even the most cash-strapped of youngsters. They can save as little as £50 a month into their Junior stocks and shares ISA and choose where the money is invested, while still being able to add lump sums, where possible.
You can even start them on their investment journey, by getting them involved when it comes to choosing the funds they invest in.
Starting a Pension for a Child
Yes, you can. Starting a pension for a child is a smart move and according to HM Revenue & Customs data, about 60,000 under-18s already have pension plans in place.
You can start saving into a Junior SIPP as soon as your child or grandchild is born. Each child can have a total of £3,600 a year, or £300 a month, saved into a pension.
Just as with your pension, the government automatically tops up payments you make by 20%, so for your child to have the maximum £3,600 a year, total contributions only need to come to £2,880.
Calculations show that if you were to invest £300 a month into a SIPP just for the first 18 years of their life without them adding another penny to it when they were old enough to, assuming 5% growth and 1.5% in charges, they would have an impressive £435,722 pension pot at the age of 65.5
Please note this is just an example for illustrative purposes. Growth in the stockmarket is never guaranteed.
Compare that to the estimated £304,596 they would have, based on the same growth assumptions, if they were to start paying into their own pension from the age of 25, and it’s easy to see why you may want to start a pension for a child.
Of course, it’s pretty much inevitable that tax rules and reliefs will change between now and your child’s retirement, and you have to factor in inflation, which will erode the spending power of any money built up in the pension, but you cannot doubt that this is the ultimate way to make sure your child has the makings of a secure financial future – even though you won’t be there to see it.