Many of us are guilty of overindulging young members of our families with toys and gifts. Giving a toy that brings joy to a child’s face is enjoyable and after the many months of not being able to see families in the same way, wanting to splash out on gifts for birthdays, or even without a reason, is understandable.
Perhaps it is for this reason that spending on grandchildren increased by an estimated £608m at Christmas 2020 to almost £2.4bn.
Despite people’s good intentions, research shows that £760million worth of presents are annually unused, unwanted, exchanged or thrown away across the whole of the UK on average.
Parents may often feel that their children have too many toys and in the longer term, putting at least some of the money that they and family members spend on presents may be better directed into a savings account or other form of long-term investment.
Here is a summary of the ways to invest for a child’s future.
Pensions may be considered the realm of the older generations, but as a financial adviser will always say, the earlier you start to contribute to a pension, the easier it is to build a substantial pot for later life. Starting a pension for a child may seem a little premature but it is a very tax efficient option and thanks to compound interest having decades to work its magic, it may be possible to accumulate a significant amount with a relatively modest input.
Any parent or legal guardian can set up a pension for a child. Once they reach 18, the pension will transfer into the child’s control and they can then start to contribute to it themselves. However, they will not be able to access the funds until age 55 (set to increase to 57 in 2028).
The maximum that can be saved in a child’s pension is £3,600 a year, which is a net contribution of £2,880, with the government automatically topping up by 20%.
Due to their greater flexibility and children being able to access funds from the age of 18, Junior ISAs are a popular way of investing for a child’s future. Deposits can be made annually up to the maximum Junior ISA limit for that particular tax year – which for 2020/21 is £9,000. Whilst some cash ISAs have more favourable rates than their adult counterparts, stocks and shares ISAs are also an option.
Compound interest will still have a chance to kick in if contributions are made from an early age and by maximising the allowance available, it can be possible to build up a nice sum for university fees or a house deposit for a child to begin their early adult life.
Putting something aside in the form of savings is always better than nothing and there are often more favourable interest rates for children’s savings accounts / regular savings accounts. These accounts are usually held in the child’s name until a certain age, with parents/guardians being able to access the money. Once an amount has built up or the maximum for a saving’s account reached, it might be an idea to then open a JISA or Junior pension with the funds.
Bare trusts are another way of accumulating savings for a child. A bare trust is a legal arrangement where money or assets are held by a Trustee (parent or guardian) for the benefit of the Beneficiary (the child). Money within the trust can be held or invested at the Trustee’s discretion. Bare trusts can allow Trustees to retain control over when and how monies are distributed until the age of 18, at which point the child assume control of the trust. Gifts into trusts can assist in IHT planning, but there are potential income and capital gains tax implications for both the child and the donor.
Saving for children is one way of passing wealth onto the next generation. To discuss these options with a financial adviser or to take a look at the bigger picture of inter-generational wealth planning, please get in touch with us.