With fears about the cost of living and the potential worry of how your children or grandchildren might secure a foot on the property ladder, it is never too early to start saving for the next generation.
Traditionally it was to start a savings account and pay a bit in regularly but there are a variety of options out there for youngsters, even setting up a pension!
One route is a junior ISA, with the same tax-free benefits as any adult ISA and a current deposit limit of £9,000 per year.
They can be opened by a parent or guardian for any child under 18, but anyone can pay into them. At 18, the money in the account becomes theirs.
There are two types – a junior cash ISA or a junior stocks and shares ISA. The first is essentially a savings account and pays a set or variable rate of interest. It’s worth remembering that no account on the market pays interest anywhere near inflation (currently 10.7%) so that is a big risk as the value of a cash-only pot erodes.
Junior stocks and shares ISA, also known as a junior investment ISA, sees the child’s money invested in the markets.
There is no ‘interest rate’ (but there is usually ‘yield’ from dividends etc on what is held) and returns depend on how investments perform and as with anything of that nature, there is risk.
It is possible to pick investments on behalf of the child or select from a ready-made option that makes choices for you, depending on the level of risk chosen.
This is really a longer term option – most recommend at least five years, to weather possible stock market lows and benefit from the highs but babies and most children have the long term to do that without ever needing access, which adults don’t!
JISAs can also receive transfers of an existing Child Trust Fund (CTF).
Did you know you could set up a pension for your child/grandchild? As with ISAs, anyone can pay in and they can have £2,880pa but HMRC will add a tax bonus of £720!
As with any pension, this money cannot be touched until at least age 57 but if contributions are kept up, the return when your child retires should be significant.
Trusts are another option, with different types available depending on how you would like the funds managed and what type of access you want the youngsters to have.
There are no limits, so larger amounts can apply. A gift will mean that it could be outside of the donor’s estate after seven years, for Inheritance Tax purposes (or annual allowances).
In summary, you need to consider who you are setting savings up for and why. If it’s to help with education at age 18, or such things as a first car, an ISA is quite straightforward. Then there are LISAs too…
If you worry the money may be used too soon and want it for their later life, a trust or a pension could be the way to go, or perhaps a combination or simply an investment where you remain a ‘guardian’.
If you’d like us to talk you through the options and your own circumstances, please do get in touch for a free and no-obligation chat.
