All parents want to do their best to secure their children’s financial future.
However, this doesn’t necessarily have to mean raiding the Bank of Mum and Dad for a house deposit, or leaving them a large inheritance.
Instead, parents, grandparents and other family members can put money away on a regular basis: by starting early, you have the potential to amass a large sum of money which they can benefit from later in life. You can also help instil lifelong savings habits in your little ones.
The earlier you start, the better, as the sum has the potential to grow through compounding.
Thankfully, as well as benefiting from a long-term approach, saving for children can be done in a tax-efficient way, by using a junior ISA or children’s pension.
If you’re saving some money for a child or grandchild, you’re likely to have two priorities: to grow the pot of money as much as possible, and to keep it out of their reach until they’re old enough to use it responsibly.
Junior ISAs allow you to do just that. You pay in up to £4,368 (£9,000 from 6th April 2020) per child each tax year, and while the money belongs to them, they can’t touch it until age 18. At this point they can choose to continue with the investment or take out some, or all, of the money.
Like a regular ISA, the children’s version incurs no UK Income Tax or Capital Gains Tax on any growth, and can be either held in cash or invested in stocks and shares.
If you’re mulling over how much money to save in a Junior ISA, consider the approach taken by NFU Mutual Senior Investment Manager Matthew Bennett. He says: “If I see excess spare funds have built up my bank account, I ask myself – will I need this money over the next few years? If not, I put it to work by investing it for the long term. With interest rates remaining so low, any cash sitting in the bank is losing its purchasing value with time”.
It’s also worth talking to a professional financial adviser who can help you make the most of you and your family’s unique circumstances.
A children’s pension
Who doesn’t wish they’d started their retirement saving earlier in life? Putting aside a large enough pot for retirement is challenging, and if you can help your child get ahead with their pension saving, you’re giving them a huge head-start.
Taking this extremely long-term approach of starting a children’s pension has another added benefit: your child can’t blow it all at age 18. In fact, they won’t be able to access the money saved in the pension until their more mature late-50s.
Children’s pensions have significant tax advantages: for every £80 contributed a further £20 will be added in tax relief. When they reach 18, or later, they can then continue to build on this fund.
“The secret to wealth creation is patience,” says Matthew. “This focus on the long-term allows the magic of compounding and allows you to invest in assets with higher growth potential which might be too volatile or illiquid in the short term. Most importantly, it gives you the discipline to avoid poor investment decisions based on the short-term gyrations of the market and instead concentrate on creating long-term wealth.”
If you start a Junior ISA or pension for your child, you’ll be doing exactly that.