As we grow our own wealth, many of us choose to start saving for our children’s future. We look at the effective options available.
For most people, planning for future wealth and a comfortable retirement is not their only goal. Parents will also look to put money aside to cover school or university fees as well as taking out life and health insurance cover to ensure that the family is well-provided for, if the worst should happen. Building all of these good intentions into your financial plan can make all the difference to achieving these objectives.
A financial plan should not be a fixed document, written once and never revisited. Families’ needs and objectives change over time and a review of your plan at least annually will ensure you are still on track. A review will also ensure that your investment strategy is continuing to deliver to your expectations and offers the opportunity to adapt your strategy as needed. Tools such as Lifetime Cashflow Planning software can help your adviser demonstrate the impact of different life events on your plan and help you ensure that you are putting enough into the pot now to cater for your needs later. It can also help you project wealth accumulation to assess any future potential Inheritance Tax liabilities and allow you to adjust your planning accordingly.
In addition to saving for family expenditure, being able to present your children with a pot of money to start them off on their adult lives is an ambition held by many parents – and grandparents too. To meet this need, there are a number of investment and savings solutions that are specifically designed for children.
The Junior ISA – known as a JISA – has many of the benefits of its adult counterpart. It can hold both Cash and Stocks and Shares investments and all growth is free of tax. There is an annual limit on how much can be invested in a JISA which stands at £4,260 for the 2018/19 tax year. Each child can hold just one Cash and one Stocks and Shares ISA at a time, although you can transfer the pot from one JISA provider to another, to get a better rate. The JISA must be opened by a person with parental responsibility for the child, although others can contribute to it once it is open.
The money in the JISA belongs to the child, but until they reach age 16 the “registered contact” – so the parent who opened the account – has responsibility for its management. Once your child reaches the age of 16, they can take over the management but they can’t touch the money until they reach age 18. At age 18, the child has full control over the money so could potentially take it all out and go on a wonderful holiday! If the money remains in the JISA, it is automatically converted to an adult ISA.
The tax advantages of a JISA are perhaps less important for the child investor, as most children don’t have other taxable income. However, the JISA framework does ensure that the money stays invested until the child becomes an adult. One word of warning, however: if your child’s JISA savings generate more than £100 of interest in the tax year, all of it will be taxed as your income.
If you or other relatives want to set up savings and investments but want to limit access by the child until a chosen age beyond age 18, then it may be feasible to use a type of trust. Trusts allow the donor/trustees to retain control but are, in the main, both more expensive to set up and run and less tax-efficient.
Banks and building societies have a number of savings accounts aimed at children. Many do not lock the money away until adulthood (although some are designed to do this) but provide a useful starting point to teach your children how to manage their money. Most will pay interest on money in the account and rates vary, so do shop around before committing to a savings provider.
Premium Bonds come from NS&I – formerly known as National Savings & Investments – which is backed by the Government. These can be bought for children under the age of 16 by parents, grandparents or great grandparents. While they don’t pay interest – and so lose value in real terms over the passage of time – there is the potential to win prizes ranging from £25 to £1 million.
A final option to consider is a personal pension. It is possible to set up a pension plan for a child from birth onwards so could make a huge difference to their eventual standard of living in retirement. Each child’s fund can receive a contribution of up to £3,600 per year gross – so £2,880 net from the contributors and £720 in tax relief, even when the child isn’t a taxpayer. Of course, any contributions to a pension fund are locked away until the child reaches the minimum retirement age, so this really is a long-term investment.
A Smith & Pinching adviser can help you build a plan that takes account of all your objectives for your family’s financial future. Call us today to arrange a free initial consultation.