Parenting is a lifelong commitment, filled with joy, worries, and sometimes sacrifice. Even though financially, children are expensive, what with the after-school activities, the copious amounts of toys bought at this time of year, as well as investing in the future, we wouldn’t have it any other way. And they are worth every penny.
Increasingly ‘children’ rely on their parents in adult life too, with house deposits and weddings to name a few reasons they might pay a visit to the bank of Mum and Dad. The pandemic also hasn’t helped matters, with one in four of the over 50s supporting their family during this time, handing over £8.6million to their loved one who needed it.
But all parents want to give their children the best start in life, no matter how old they are, so here are some of the reasons and ways of investing in the future for your child (or even grandchild):
Why is investing for your children important?
A financial head start
Between getting married, putting down a deposit on a house and paying university fees, there’s not much chance for young adults to catch a break. And more often than not, they’ll need financial support to get them on their way.
Exposing children to aspects of money and finance from a young age encourages good habits and a better grounding for investing in the future. In addition, placing money into savings will help them become financially independent, giving you greater freedom with your finances and less worry in the future.
Slow and steady wins the race!
As we grow older, we tend to (although not always!) get wealthier; throughout our lives, we become collectors of assets, which hopefully increase in value the longer we hold them. So, the earlier you start saving, the bigger pot your children will have at the end of it. Even a small amount could make a significant difference over time.
If you’re lucky enough to be in a comfortable financial position, one concern that may crop up is the inheritance tax (IHT) bill your loved ones face after you’ve gone. So, rather than waiting until this point to pass on some of your wealth, why not think about drip-feeding it throughout your life.
Investing in the future for your child/children (or grandchildren) will help reduce or eliminate any IHT concerns that might arise as you approach later life. And if this is something you’re concerned about, you can read our ways to reduce your inheritance tax through estate planning and how to prepare your family for a transfer of wealth.
5 ways of investing in the future of your child
A bit of a crazy thought, right, a child with a pension?! Their retirement may seem a world away, but you could open a Junior Self-Invested Personal Pension (SIPP) for them. At the rate we’re going, younger generations will be working for a long time to come. The State Pension age was 65, but this is gradually increasing for people, reaching 67 by 2028 and 68 by 2037. And who knows what the future holds further than that.
So, one way to lend a helping hand would be to boost their retirement savings. Although the money won’t get utilised for a long time, you can currently pay £2,880 per year into a junior pension and receive 20% tax relief, boosting the savings to £3,600.
Under current rules, your child can take the pension over when they turn 18, but they won’t have access until their at least 55, if not older, with changes to legislation. Not having access to the pot will ensure the money doesn’t get squandered too. However, it is worth noting that pension rules can change, so the advantages and legislation surrounding them may differ by the time they come to retire.
NS&I premium bonds
National Savings and Investments (NS&I) Premium Bonds are a popular option for both adults and children. You can put money in and take it out as and when you want, and you can buy any amount from £25 – £50,000. You don’t earn interest on this money; instead, there’s a monthly prize draw. And, the more money you put in, the higher the chance of winning.
If that’s not enough, any winnings are tax-free, and you have the chance of winning up to £1million!
By buying them for children, it’s a fun way to get them engaging with their finances. Which, after all, will help them understand why financial planning is so important. Anyone can buy them for children under 16; it’s not just limited to parents or guardians, and once they turn 16, they become the owners of their bonds.
Junior ISAs (JISA) are tax-free savings accounts for under-18s. There are two types of Junior ISA: cash and stocks and shares, and both enjoy tax-free interest or investment growth. You can save up to £9,000 (2021/22) in total in a JISA and can split it between a cash and stocks and shares account.
A parent must open a JISA account, but anyone can pay into it, and your child will only gain control of the account from age 16, although they won’t have access to the funds until they turn 18.
Children aged 16-17 can also open a Cash ISA and save up to £20,000 (2021/22) into total into their JISA and Cash ISA each tax year.
What’s more, saving in a Junior ISA is separate from your ISA allowances, so there really is no downfall. If you’re able to be able to contribute the JISA allowance of £9,000 each tax year, from age 0 – 18, your child could have a savings pot worth £260,000! – assuming a growth rate of 5% per year after charges.
Understanding the value of money is one of the most important lessons for a child. Hence, the earlier you give them control over their finances, the sooner they learn this lesson. And hopefully, the better savings habits they will develop.
You can either save into a children’s easy-access savings account or a regular savings account. Easy-access savings accounts allow you to withdraw money whenever you like. Or you can get better interest rates if you can make monthly contributions into a regular saving’s account.
There’s no interest to pay on children’s savings accounts unless they receive more than £100 of interest on all the money given by a parent. If that’s the case, you, as the parent, will be taxed if this is above your own Personal Savings Allowance. Importantly, this doesn’t apply to money gifted by grandparents or other people, only parents.
Investing in stocks and shares
Another option is investing money in stocks and shares on behalf of your child. You can hold investments in a designated account, which will be attributed to your child but treated as your investment. So, any gains will be subject to your CGT rate, and any income over £100 will be added to your income position.
The child does not own a designated account. It’s just showing an indication that you intend to pass that money on. These accounts provide greater control and flexibility but aren’t as advantageous tax-wise.
There is the option to hold these in trust for your children, which can alter the tax treatment.
The benefits here are that these investments can generate higher returns than the interest you get with children’s saving’s accounts. In addition, if you start early, there’s plenty of time for your investment to grow and withstand any market volatility. However, there’s no guarantee that you will make this money back, and you may have to pay additional investment fees.
How much can you save?
Currently, you can save £2,880 net per year into a child’s pension, providing £3,600 after tax relief is added. There’s also a JISA allowance of £9,000 each tax year (2021/22).
A total of £50,000 can be saved into premium bonds, which is also tax-free.
There’s no limit on the amount of other savings allowed, such as cash savings accounts or stocks and shares held outside of an ISA or Pension, but the amount of interest/income or gains generated may be subject to tax or taxed based on the parent’s tax situation.
Children, technically, are liable to tax and have the same allowances as adults; with a personal allowance of £12,570 in 2021/22, a £5,000 starting savings allowance, and a £1,000 personal savings allowance, this allows them to potentially earn £18,570 tax-free in the current 2021/22 tax year.
But watch out for the ‘£100 rule for parents’. Any savings given to a child by a parent or stepparent is taxed at the parent’s tax rate if it produces more than £100 a year in interest.
If you have any questions or would like to discuss your finances or want to consider investing in the future for your children, please don’t hesitate to get in touch and speak to one of our independent financial planners.