Investing for your children
It’s most parents’ aim to set their children up for a successful and fruitful life, especially with the ever-rising cost of university and buying their first home. Therefore, it’s never been more important to look at ways you can help by investing for your child, but how and where do you invest to give your children the best financial future?
The good news is that this can be very simple and investing your money now can go a long way in the future. For example, a contribution of £300 a month from birth could give a child £85,000 at the age of eighteen, assuming a potentially modest 3% growth rate each year. So, what are the options?
Child Trust Funds and Junior ISA’s
Child Trust Funds (CTF) were one of the first investment vehicles aimed at children; launched in 2005 they gave incentives such as a £250 government bonus on the child’s birth and then again on their 7th birthday. Child Trust Funds have since been replaced by Junior ISAs (JISAs) with many children’s investments featuring tax incentives either upon investing or in how the money can be accessed later in life, which could be worth taking advantage of.
These are just some of the ways you can invest, but there are various ways of investing money for your children’s future, so let's look at some of the best ways and the drawbacks of investing.
What is the best way to save for your children?
As noted earlier, small contributions in the early part of a child’s life can make a real difference, years down the line. In terms of the best way to save for children, there probably is no exact answer; a JISA (as mentioned) with its recently increased annual allowance of up to £9,000 and tax-free growth and withdrawals would be a superb starter, but it also comes down to what you, as parents, can afford and the risk you are willing to take. Looking at JISAs, there are two types; a cash option or a stocks and shares, a child can only have one of each.
One key thing to consider with a JISA is that once your child turns eighteen, they will get full control over the JISA which could be a very significant sum of money for someone of that age to have control over. Therefore you as parents may feel uncomfortable; you are contributing large amounts of money to something your child will ultimately control at the age of eighteen. It’s also important to mention that a child with a Child Trust Fund can’t have a Junior ISA unless the Child Trust Fund is first transferred to a Junior ISA and then the Child Trust Fund closed.
Most parents probably don’t think about investing into their child’s pension, but this can be an amazing way to set them up for the rest of their life. It does mean your child will not be able to access the pension money until they are far more grown-up at age 55, rising to 57 in 2028.
You would hope, by then, they would be a little more sensible with the money. By investing in your child’s pension, you can also benefit from tax relief on contributions of up to £2,880 net into the pension each year, with the government topping up the contribution by 25% to £3,600 gross (if your child has earnings over £3,600 pa more can be contributed and given tax relief). The added advantage of the child’s pension is that there is a very long investment time horizon, which would allow you to consider a wider range of investments for your child.
You can also use Trusts to save for your children, as a Trust is a legal agreement in which the settlor gives the Trustee powers to look after the investments, property etc. for the benefit of the beneficiaries; in this case it would be your children. You as a parent can be both a settlor and Trustee.
Two common types of Trusts are Bare Trusts and Discretionary Trusts, the latter of which could be more appropriate if control is a concern. A Bare Trust would allow the Beneficiaries to have access to everything within the Trust at age eighteen, unlike a Discretionary Trust. A Discretionary Trust would have appointed Trustees whose job it would be, to distribute the assets of the Trust to the Beneficiaries with the settlors’ wishes in mind.
What about risk?
In terms of the best investments for children’s future this is very much dependent on:
- Investment time horizon.
- Attitude to risk.
When investing for children you should be looking at the long-term which in turn could mean a higher risk strategy with some stock market exposure.
However, these days with the frightening cost of university and the extra costs associated with it, many parents save for their children’s education which may only be a few years away. In this case the best investment for children may be a simple Cash ISA or savings account as you do not want the volatility or the possibility of a market slump just before needing access to the money.
Long-term savings plans for children
The importance of a long-term savings plan for children cannot be overstated. A planned approach to saving for your children is essential whether this be with the help of a financial adviser or not.
In most cases a plan will include choosing the right account, picking the underlying investment, and setting up the regular savings. If your plan is to invest for the long term for your children, you are probably sensible looking for a tax efficient wrapper. As mentioned earlier this could even be to fund their retirement or possibly their first house deposit.
A Lifetime ISA
A relatively new investment vehicle on the market applicable to long term investing is a Lifetime ISA (LISA). A LISA is aimed at providing a fund for your child’s first home or in retirement. Please do note these LISAs are only for persons aged over eighteen and under forty and are restricted to a contribution of £4,000 per year, but you do get a government bonus of 25% on each contribution.
This means your child will be able to add £4,000 per year into a Lifetime ISA and receive a 25% bonus. Unlike a typical ISA, a LISA has restrictions upon withdrawing the funds as there will be a 25% charge unless the funds are used for a first house deposit or are accessed from the age of 60.
This should provide some safeguarding when it comes to your child not spending all the money you have saved for them from a young age.
Do you need to pay tax on a child’s savings account?
The answer is no; however, there are a few exceptions when you will have to pay tax. Most often referred to as the £100 rule, this is where if the interest or other income earned on a children’s savings account that contains funds supplied by a parent exceeds £100 a year (or £200 if both parents have gifted the money), all this income will be added to your income and taxed as if it were your own, not just the amounts over £100.
One way to negate this is to use a tax efficient wrapper such as a JISA for your children’s savings. Also, please note the £100 rule, is only applicable to parents, it does not apply to grandparents and other family members or friends. It is purely designed to stop parents putting large amounts into their children's savings accounts to avoid tax.
Earlier in the article investing for children within a trust was mentioned, this can also bring with it a tax charge for you, the parents. This again is when the income within the trust is over £100 a year (per parent settlor), it would be treated as income of the settlor of the trust and then taxed accordingly at their marginal rate. With a discretionary trust this only applies if income is actually distributed to or for the child’s benefit.
How can we help?
Here at The Private Office, we are chartered, independent financial planners and can look at whole of market solutions for you and your children. If that would be using a children’s pension or JISA to invest into the stock market or simply advise on the best cash savings rates for your children. Once the most appropriate investment wrapper is chosen, we can then advise on the best investments to be held within the wrapper, always putting your needs and requirements first.
We have an expert Investment Committee with a wealth of experience building investment portfolios which cater for all client needs and objectives whether you are an existing or new client. We also offer an ongoing service to you and your child, whereby on an annual basis we would review the investments to ensure they are still suitable for your child’s needs, ensure you are utilising all allowances, and have a meeting to discuss any changes to your needs or objectives that we need to take into account moving forward.
If you’d like to learn more about how we can help shape you and your child's financial future, why not get in touch and arrange a free consultation.
Please note: The Financial Conduct Authority does not regulate tax advice or trusts.