The secret of successful saving for children is to start early.
It costs £229,251 to raise a child to 21.1 With stagnant wage growth and low interest rates, many parents feel squeezed to make ends meet, let alone think about funding future costs like university or a housing deposit.
As expenses rise and returns from savings fall, the idea of building a nest egg for your child might seem far-fetched and, of course, it’s at least as important to teach children good savings habits. But saving for your kids need not break the bank and could make a huge difference to their future.
Distant goals are generally easier to afford. Buying a first home or paying for further education or training can be made far more affordable by starting early. The principle is very simple: the longer the investment has to mature, the greater the benefit will be from the year-on-year compound growth of reinvested returns: investing £200 a month for five years can grow to over £13,000.*
There are a number of government schemes to save for children. The tax-friendly Junior Individual Savings Account (JISA) is a very attractive option. Any returns are free from Income Tax and Capital Gains Tax. Savers can typically make regular or one-off payments up to the current annual limit of £4,368. Money held in a JISA is locked in until the child reaches 18, after which it can be converted into an adult ISA and continue to enjoy the same tax advantages.
Less well-known is that children can have a pension fund as soon as they are born. Setting one up can bring significant tax advantages since, as you save, the government adds a generous tax relief.
Contributions up to the maximum of £2,880 a year are automatically grossed up by the government to take account of tax at 20%, giving a maximum annual investment of £3,600. Even a few years of contributions can build a substantial pot.
Just as with pensions for adults, pension pots for children benefit from tax breaks. In common with JISAs, anyone can pay into the pension – parents, grandparents, godparents, friends or other family members. (However, only parents and legal guardians can actually set one up.) Saving this way may also help mitigate an Inheritance Tax (IHT) liability. Payments from grandparents, for example, may be covered by the annual £3,000 IHT gifting allowance, or the exemption for payments made out of income.
Under current legislation, savers can gain access to their pension fund at 55 – although this will change to 57 in 2028 and from then on it will be set at 10 years below the State Pension age. But the benefits can be felt long before that. Saving into a pension for your children allows them to focus instead on the costs of starting a family and buying their first home.
“I invested for my daughters from day one to give them financial independence in the future,” says Rob Gardner, Director of Investments at St. James’s Place. “It will empower them to make the decisions that are right for them, whether that’s travelling the world or buying a house.”
The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested
An investment placed into funds (equities) would not have the security of capital associated with a deposit account with a bank or building society.
The levels and bases of taxation, and reliefs from taxation, can change at any time and are dependent on individual circumstances.
1 Centre for Economic and Business Research, September 2019
* Assumes an annual growth rate of 5% net of charges. This figures is an example only and is not guaranteed – it is not a minimum or maximum amount. What you will get back depends on how your investment grows and on the tax treatment of the investment. You could get back more or less than this.
The information and opinions contained in this blog are for information only. They are not intended to constitute advice and should not be relied upon or considered as a replacement for advice. Before acting on any of the information contained in this blog, please seek specific advice from Gilson Gray Financial Management.