Saving for a child’s future is one of the most important investment decisions a parent or grandparent will make. With your children facing increasing costs at life's milestones, the earlier you can start saving for them the better.
There are a lot of different investment vehicles available to you beyond a bank deposit account. But it's difficult to make the right decisions around how to invest for a child unless you know a little about the various types of investments available. Here you will find the information you need to help kick-start your child's financial future. Investing for children not only makes you feel better by helping the next generation, but is also a tax efficient way of making extra savings that can be used towards meeting your child's education costs.
Points to consider when investing for children
When thinking about investments for children, it's well worth considering these points:
- Using the child's tax allowances and minimising Inheritance Tax (IHT)
- Keeping costs down
- Maintaining flexibility: for example, are there any restrictions on investments?
- Controlling access: are you happy for the child to gain control at 18?
6 ways to invest for your children
In this post and two others over the coming weeks, we'll look at 6 different ways of investing for children, these being:
- Junior ISAs
- Self Invested Personal Pensions (SIPPs)
- Bare trusts
- Designated accounts
- Discretionary trusts
- NS&I Children’s Bonus Bonds
Lets start by looking at Junior ISAs in more detail.
Junior ISAs
Junior ISAs can give your child or grandchild a head start in life and provide an excellent tax-efficient way of saving for a child’s future. You can invest in a Junior ISA each year and the money invested will grow over time and be available to the child on their 18th birthday. If you opt for a Stocks & Shares Junior ISA, it could be worth nearly £108,000* if you invested £300 a month from the birth of a child until they reach the age of 18. The other benefit is there will be no income or capital gains tax to pay.
*This projection is for illustrative purposes and assumes a growth rate of 6% after charges and is not guaranteed.
Key points
- A Junior Individual Savings Account (JISA) can be set up in the child’s name by a parent or guardian
- You can set up a Stocks & Shares ISA or Cash ISA or a combination of both
- Any investment growth is free of income or capital gains tax
- For the 2012/13 tax year, the investment limit is £3,600 – this will rise in line with inflation from 2013
- Available to each child in the family each tax year
- Anyone can contribute to a child’s account at anytime through the year
- Money is locked away until the child reaches the age of 18, giving your investment time to grow
- The child is the beneficial owner of the Junior ISA
Main features
- Available to all children who missed out on the Child Trust Fund
- Parents, grandparents, family and friends can contribute up to £3,600 a year
- Money is locked away for the child who can withdraw the proceeds when they reach adulthood
- Tax efficient like an adult ISA
Tips for Junior ISA investing
- As the Child Trust Fund voucher has been taken away, the key incentive of a Junior ISA is the tax benefit
- It’s worth spending some time considering how you want to invest through a Junior ISA, as there can be large differences between returns from cash or share ISAs
- A Junior ISA is a long term investment, so it might well be worth choosing stocks and shares over cash as it has greater potential over long periods
- Remember, once you put money in a Junior ISA your child won’t have access to it until they are 18
To find out more about Junior ISAs, visit our two other blogs, What’s the difference between a Junior ISA and Child Trust Fund? and Junior ISAs –Your questions answered.
Suitability
You should, of course, only consider investments that are right for you. If you are in any doubt about the suitability of an investment, please speak to an Independent Financial Adviser.
In the next part of this blog series, we’ll take a look at how you can use a personal pension such as a Self Invested Personal Pension and a Bare trust to invest for your children.
As always, if you have any questions or thoughts on the points I've covered, please leave a comment below or connect with us @ISACO_ on Twitter.
Please note past performance should not be used as a guide to future performance, which is not guaranteed. Investing in Funds should be considered a long-term investment. The value of the investment can go down as well as up and there is no guarantee that you will get back the amount you originally invested.
Find out where an expert invests
Are you an ISA or SIPP investor with over £100,000 actively invested? Are you looking for better returns but are unsure which funds to invest in? ISACO Wealth, our personal investment service, allows you to buy the same funds as a star-performing investor. You find out where he invests, keep full control of your account, enjoy a close relationship with a trusted expert, and benefit from the potential for attractive long-term returns.
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