We all want the very best for our children and grandchildren and that includes making sure that they have a good financial start in life.
Whether it’s helping them get to university, buy their first car or giving them a helping hand onto the housing ladder, who wouldn’t, as they become adults, want to see the joy that a financial gift brings.
How best to save and invest for children is a question we’re often asked.
Peter Green, Chief Executive of the Society and a parent of two offers his views on the various options that are available.
‘Start as early as possible, make it a regular habit and encourage others to invest rather than buy presents, has in my experience been the best approach.’
The obvious starting point is a bank or building society deposit account, however, Peter expressed caution. A simple deposit account is a great way of teaching children how accounts work by encouraging them to save for a treat or keep their birthday money safe until they are ready to spend it. However, with interest rates lower than inflation it’s not the best place for longer-term saving.
Every child born in the UK between 1 September 2002 and 2 January 2011 will have a Child Trust Fund. Child Trust Funds were a government scheme designed to encourage parents to invest for their children. Whilst new Child Trust Funds can’t be opened anymore those who have them can continue to invest in them.
All children who don’t have a Child Trust Fund can invest in a Junior ISA and those who do can transfer their Child Trust Fund into a Junior ISA. The main advantage is that, just like adult ISAs, they are tax-free.
There are bank and building society cash deposit Junior ISAs and stocks and shares based Junior ISAs. Children can have 1 cash and 1 stocks and shares Junior ISA; you can’t open new accounts with different providers every year like you can with your ISA, although you can transfer them to different providers when opened. They must be opened by parents or legal guardians, however when open anyone can pay into them.
Currently you are only allowed to invest £4,368 per year in a Junior ISA, however this limit is likely to increase in future years.
With interest rates remaining at a record low you are likely to get a better return on a stock market-based investment, however, there is a risk that the value of the investment can fall. There is an alternative. A With-profits Junior ISA offered by life insurance companies and friendly societies gives you exposure to the stock market whilst many of them guarantee the value of your investment when it matures.
The big disadvantage of Junior ISAs and Child Trust Funds is that as soon as the child reaches the age of 18 the money is theirs. They can register with the provider and make decisions on who the Junior ISA is invested with from their 16th birthday and when they are 18 they can access the funds without the permission of whoever has made the investment.
If parents or grandparents have built up a significant lump sum in a Child Trust Fund or Junior ISA then it’s important to talk to their children about using the investment sensibly.
If you want to save for your child’s 21st or to help them onto the property ladder the Junior ISA might not be the best solution.
For many parents, the best way to save for their children is by making a commitment to save a relatively small amount on a regular basis. Whilst deposit accounts and Junior ISAs are flexible the discipline of regular monthly saving can make a huge difference to the opportunities your child might have.
Tax Exempt Savings Plans, which are only available from friendly societies, are a great way of building a cash sum for your children. They enable you and every member of your family to save up to £25 per month on a regular basis. As plans can be taken in both parents, children’s and grandparents names a significant amount, paid out tax free, can be built up for your children.
There are two main advantages to Tax Exempt Savings Plans. The discipline of regular saving and the opportunity to choose at the start of the plan at what age you want your child to receive the cash sum you have saved for them. I, like many parents, felt that 18 was too young and wanted to save for their 21st birthday.
Finally, there is another option if you believe that your children might not be responsible with money until they are much older. You can invest in a pension for them. A Junior Self Invested Pension Plan allows you to invest in a pension for them whilst they are still children. It might be very tax effective for those with a lot of money but your children won’t be able to access the funds until they are 55. Hopefully, by then they’ll be a bit more responsible.
Healthy Investment is not able to provide advice on the suitability of any products for your personal circumstances. If you are in any doubt you should seek financial advice from an FCA authorised financial adviser.