March 22nd, 2021
Everything you need to know when saving for your children
As a parent, you’ll want to give your children the best start in life and so it’s likely that you’ve started to think about their financial future. You may have already started putting some money aside for them, such as for university fees or even a deposit on a home.
If you want to help your child financially, there are many different options you can choose. Read on for everything you need to know when saving for your children’s future.
Start saving early to take advantage of compound interest
When saving for a child’s future, the best thing you can do is to start early. Not only does this give you more time to make contributions, but also because of the significant effect that compound interest can have over time.
This means that your children won’t just benefit from the returns on the money you saved, but also on the returns on the growth.
For example, if you were to place £1,000 in a savings account for your child with an interest rate of 2.4%, the account would grow by £24 by the end of the year.
In the second year, this £1,024 (your original deposit plus the interest from the first year) would earn £24.58.
This may not initially seem like much of a difference, but the impact of compound interest increases significantly over time.
Low interest rates can make traditional savings products unattractive
One of the easiest ways to save for a child’s future is to open a bank account on their behalf. You can typically open an account for any child up to 18 years old and with only £1 at most banks or building societies.
You can also rest assured knowing that any money that you put into them is safe, as the Financial Services Compensation Scheme covers up to £85,000 of savings.
However, savings accounts tend to suffer from low interest rates which means that they run the risk of having their true value being eroded over time due to inflation.
That’s why, if you want your child’s wealth to grow, you may want to consider a Junior Individual Savings Account (JISA).
Junior ISAs are a tax-efficient way of saving for your child
Junior ISAs are a useful and tax-efficient way to save if you want to build up a lump sum for when your child turns 18.
While only a parent or guardian can open a Junior ISA, anyone can make contributions to it, so any of your child’s relatives can chip in. In the 20/21 tax year, you can save up to £9,000 into an ISA, equivalent to £750 per month.
There are two types of Junior ISA which you may want to consider. The first is the Junior Cash ISA.
These savings vehicles are easy to contribute to and can result in a good nest egg for when your child turns 18. One of the main benefits of a Junior ISA is that any interest on the amount you contribute is paid tax-free.
Bear in mind, however, that cash ISA rates tend to be low, which means that the returns may not keep up with the rate of inflation.
Alternatively, you may prefer to open a Junior Stocks and Shares ISA which lets you invest in stocks, shares, and bonds on your child’s behalf. Like with Junior Cash ISAs, returns on these investments are free from Income Tax or Capital Gains Tax.
While Junior Stocks and Shares ISAs do put your capital at risk, they can produce better returns than Cash ISAs.
According to the Times, if you invested the full £9,000 into a Stocks and Shares ISA for your child each year, with an average return of 5.5% it would be worth £279,924 by the time they turned 18.
Trusts can hold several forms of capital at once
Another way you could save for your child is to set up a trust. These can hold many forms of capital at once, which can be useful if you have cash, shares, and equity that you want to pass on to a child.
Having assets in a trust can also reduce the risk of your child losing access to them in case of bankruptcy or divorce.
A trust also holds the wealth that the assets generate. This can provide tax-efficient growth, as it may be taxed as your child’s income instead of yours.
There are many types of trust to choose from, depending on your circumstances, including bare and discretionary trusts. If you aren’t sure which is right for you and your child, you should consider speaking to a financial adviser.
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The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.