Planning & protection
Rachel Storey
The majority of parents want to give their children the best start in life and what better way than financially investing in their future?
Christmas is traditionally a time for giving and it could be the perfect time to gift your children and grandchildren with something that they can appreciate for years to come.
There are a number of ways you can start investing for children and even small amounts can really add up over the long-term. It could also have the added advantage of helping you to benefit from tax incentives to reduce the amount of tax paid, both now and in the future.
So what are your options?
With recent market volatility, some people are naturally concerned about their returns on investing, but with up to an 18-year horizon, putting money to work in the market can give significantly higher returns.
And investing some money, either as a one-off lump sum or on a regular basis, can be an ideal way to give a child a head start in life.
There are a range of options available when it comes to the ownership of investments for a child. Children receive many of the same tax-efficient allowances as adults, so it’s worth looking at specialist child investment accounts.
Some people prefer to keep investments for children in their name so that they have the option to access them in the future should they need to. It’s worth noting that if you keep personal ownership of the investment, it will be your tax rates that apply, not the child’s. Also, if the investment remains in your estate on death, more taxes could be payable, so be aware of this.
One option to consider is a Junior Individual Savings Account (JISA). Introduced in the UK in November 2011, a JISA is as long-term savings account set up by a parent or guardian and lets you save on behalf of a child under 18, without paying tax on income or gains.
With a Junior Stocks and Shares ISA account, you can put your child’s savings into investments like funds, shares and bonds. Any profits you earn by trading investment funds, shares or bonds are free from tax.
Investments are riskier than cash. They could give your child a bigger profit but always remember that the value of a Junior Stocks and Shares ISA can go down as well as up.
The JISA limit for the tax year 2022/23 is £9,000 and the money in the account belongs to the child, but they can’t withdraw it until they turn 18, apart from in exceptional circumstances. They can start managing their account on their own from the age of 16.
When the child turns 18, their account is automatically rolled over into an adult ISA and they can choose to take the money out and spend as they like. Therefore, it’s also important to make sure that children are given financial education from a young age so that they use their funds wisely when they get their hands on them.
A trust is a legal arrangement in which assets can be settled by a parent or grandparent for example, for the benefit of someone else, such as a child.
Assets settled into a bare trust are held in the name of the trustee(s) and when the child is 18, they have the right to all the income and gains from the trust. These are taxed as if they belong to the child, often meaning little or no tax. There are however special rules in respect of income tax when the trust is established by a parent and therefore it is important to take financial advice first.
There are no limits to how much you can put into a bare trust and unlike a JISA, the money can be accessed at any time before the child is 18, as long as it is for their benefit.
Trusts can be complicated though, so it’s always worth seeking professional advice first.
A discretionary trust can be a flexible way of providing for several children, grandchildren or other family members.
For example, you might want to set up a trust to help pay for the educational costs of your grandchildren.
The trust can have a number of potential beneficiaries and the trustees can decide how the income is distributed.
However, it’s worth keeping in mind that the tax rules can become complex when using a discretionary trust.
If you’re six, your focus might be more on Barbie and Lego than whether you will have enough money to retire, but starting an early years pension can help set them on the right path to ultimately enjoy their golden years.
And it’s never too early to start as the sooner someone starts saving the more they will gain from the effects of compounding returns.
Children have an annual pension allowance of £3,600 with contributions benefiting from 20 per cent tax relief. So that means a parent or grandparent can invest up to £2,880 which would then be topped up by the Government by £720 and as with all pensions, returns are also tax-free.
However one thing to be mindful of is that the current minimum age at which personal pensions can be accessed is age 55 and this is set to rise to 57 by 2028 and so it’s a much longer term approach to investing.
Putting money aside for a child is not only a great way to prepare for their future, it can also teach valuable lessons about managing their finances – and arguably that’s the best financial gift you can give.
We develop our attitudes and beliefs about money in childhood. And by talking about money, budgeting and good money management habits, you can start the foundations to setting your children up for a future of financial success.
If you are unclear on how you can get started, we’re here to explain your options
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