Preparing for your child’s financial future has always been important – and the sooner you start saving, the more time their money has to grow.
Saving into a pension is a popular option with a Freedom of Information request by Lubbock Fine Wealth Management finding that £68.4m was injected into children’s pots in the past year alone.
Using traditional savings vehicles such as ISAs is also common, with investment platform, IG, recently urging the Government to scrap cash ISAs and invest £1,000 into a Junior ISA (JISA) for every child from birth.
We speak to experts about the ways you can save for your child or grandchild’s future – and the pros and cons of each.
Opening a Junior ISA
There are two types of JISAs – a cash JISA and a stocks and shares JISA – designed for children under 18 which allow a parent or guardian to save £9,000 a year tax-free for their child, who can then withdraw the money once they turn 18.
The benefit is that a child has a financial pot for the point when they reach adulthood – whether that’s helping with university costs, a first home, further education or simply giving them a stronger financial foundation as they start out in life.
However, some financial advisers have highlighted that once the child becomes 18, they gain unrestricted access to the pot, meaning they could “blow” all of the money in one go.
IG has suggested getting rid of cash ISAs and putting £1,000 into a JISA for every child from birth would help them become investors, not just savers.
Angeline Ong, senior investment analyst at IG, said for most families wanting to save for their child’s future, a JISA is “the obvious place to start”.
‘I’m worried about their future’
Sophia has been contributing to her twin daughters’ ISAs since they were born (Photo: Sophia Jarvis)Sophia Jarvis, 33, from London started saving for her twin daughters as soon as they were born – two years ago.
She saves into a Junior SIPP and Junior Stocks and Shares ISA, for both of her daughters, contributing £50 to each account each month.
Sophia said: “I’m worried about if they’re ever going to be able to afford their first home or even retire comfortably. I wanted a way for family and friends to be able to gift smarter by giving them a gift that can grow with them instead of buying them more stuff.”
This worry was one of the reasons Sophia recently set up Mia Wealth, an app that allows family members to gift money towards a child’s ISA through a link.
She said: “For the twins’ first birthday, I sent a gifting link for their junior investment accounts to family and friends as they don’t need any stuff. They both had an extra £350 invested each.”
The girls both have £2,000 saved across their accounts so far and Sophia says not only is it investing for their future, but it has reduced the countless number of toys that get gifted which end up going to waste.
Opening a Junior SIPP
A Junior SIPP (self-invested personal pension), which was introduced in 2001 under Tony Blair’s Labour government, can be opened by a parent or guardian for a child who is under 18.
If you contribute the maximum £2,880 each year, £720 in tax relief is added to the account – a total of £3,600 – which can be accessed by the child once they reach retirement age, currently due to rise to 57 in 2028.
Once the child reaches 18, they can begin to make their own contributions to the pension but they cannot access the fund any earlier than retirement age.
If the maximum was invested from birth until the age of 18 with 7 per cent yearly return and 2.5 per cent inflation taken into account, the amount would be worth £83,970 at 18 and £448,601 at 57 – if no other contributions were made post 18.
Contributing to a Junior SIPP is becoming an increasingly popular option for grandparents looking to reduce their tax bill as upcoming changes next year will see pensions brought into the scope of a person’s estate when inheritance tax is calculated.
Another pro is that it has more time to stay invested and therefore benefit from better returns.
However, some advisers say the fact the money can’t be accessed until retirement age is “a drawback” and makes it less effective.
Sam Binstead, financial planner at Chilvester Financial, said: “£3,600 a year from birth at a decent return genuinely could be worth six or seven figures by the time they’re eligible to touch it.
“But that’s exactly the problem. Currently that’s age 57 and for a baby born today, nobody has the faintest idea what that number will actually be by the time they get there.”
Money can’t be taken early out of a Junior SIPP, apart from exceptional circumstances.
Maxing out your own allowance
Binstead suggested the most effective thing parents could do for their children was fund their own pension and ISA first.
“You get the same, or better, tax benefits, keep control of the money, and can gift later, once you know what the child actually needs. For a parent earning £100,000 to £125,000, pension contributions also recover lost personal allowance, as it reduces your net income, so the same £2,880 does far more in your own pension than in a child’s,” he explained.
However, saving for your children within your own ISA will detract from your £20,000 annual allowance and from April next year, if you are under 65, you will only be able to save £12,000 into a cash ISA.
Jamie Flook, managing director at LAB Financial Planning, said this was a “small trade off” depending on how much you intend to save for your child.
“One of the most expensive times of life is university and being a young adult, when you don’t have a job or if you do, it doesn’t pay much. Getting on the housing ladder is very difficult without help.
“So why not save for the more pressing need, particularly one you might to see them benefit from, rather than for their retirement [through a Junior SIPP].”
Investing rather than saving
Eduardo Ferreira Simoes, a financial planner at Julian Harris Adviser Network, said: “For most families saving from infancy, a diversified stocks and shares Junior ISA should be the default starting point, with risk gradually reduced as the money approaches its intended use.”
Alex Campbell, director of external affairs at investment platform, Freetrade, went one step further and said Junior ISAs should be investments only and not have the option to have savings sitting in cash.
He said: “Most people don’t appreciate that inflation eats into their returns and locking up cash for 18 years is creating the ideal set of circumstances where the child will lose while it appears that the balance has risen modestly.”
Other alternatives
A JISA is aimed at helping children in their younger lives while Junior SIPPs address later life savings, but advisers point out there doesn’t seem to be a product that sits in between the two.
Amyr Rocha Lima, managing director at Strategic Wealth Partners, said: “Nothing exists for the years between 18 and 57, when many young adults most need support.”
He suggested the government should look to introduce a single account opened in childhood that follows the young person into adult life, with access in stages rather than all at once at 18.
“It would be funded in the same way as a JISA. From 18, the money could be used for specific purposes, such as education or a first home. Everything else would unlock at 25 or 30, and anything still unused at that point could move into a pension with tax relief, so the savings keep a purpose even if they are never needed for a deposit,” Rocha Lima explained.
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