The financial challenges younger generations are facing are well-documented. From difficulties getting onto the property ladder to paying for further education, reaching traditional milestones can be expensive. If you have a child or grandchild, taking steps to build a nest egg can give them a helping hand as they gain independence.
Whether you have a lump sum you want to put away for them or plan to make regular contributions, the product you choose is important. Here are three options to consider.
1. Savings account
A savings account is a traditional option when saving for a child.
There’s a huge range of savings accounts to choose from and they will pay interest on the deposits you make.
While they may offer better rates than adult counterparts, interest rates are still low. As a result, money saved in a savings account over the long term is likely to decrease in value in real terms. Some accounts will have restrictions, such as how much you can deposit or withdraw. Those with restrictions are likely to offer the best interest rates, but make sure they don’t negatively affect your plans.
One of the benefits of most savings accounts is that you’re able to make withdrawals. This makes it a good option if you may want to access the money before they reach 18, for instance, to pay for school trips, or to allow the child to save for their own goals, such as a new toy, and instil good money habits.
When should you use a savings account? When you want a flexible option that allows you to make withdrawals while they’re still a child.
2. Junior ISAs
Junior ISAs (JISA) work similar to adult ISAs. You can either save the money in a Cash JISA or invest through a Stocks and Shares JISA. The interest or returns delivered will be tax-free. Each tax year, you can place up to £9,000 into a JISA. This allowance can’t be carried forward and it can either be used in a single account or spread across multiple ones.
JISAs are a popular way to save. According to HMRC figures, there were around 954,000 JISAs in 2018/19. In that tax year, £974 million was added to these accounts, with around 57% being held in cash. However, keep in mind, the money cannot be accessed until the child reaches 18 when they will have control of the funds.
It’s worth noting that if your child or grandchild was born between 1 September 2002 and 2 January 2011, they will have had a Child Trust Fund opened in their name and contributions made by the government. Funds in these now-defunct saving products can be transferred to a JISA.
A Cash JISA will hold any deposits you make in cash and interest earned.
Assuming you stay within the £85,000 limit for the Financial Service Compensation Scheme, this money is safe. However, while JISA interest rates are usually higher than savings accounts, they are still low, and inflation means it will decrease in value in real terms. This is a particular concern if you’re saving over the long term, allowing inflation to eat further into your savings.
When should you use a Cash JISA? If your child is turning 18 in the next few years and wants to access the money, or if you don’t want to take any investment risk with savings.
Stocks and Shares JISA
A Stocks and Share JISA will invest the deposits you make to hopefully deliver returns over the long term.
You should only invest with a long-term goal in mind (minimum five years), so if your child is 16 and hopes to use the money for university, you should assess other options first.
As with all investments, there will be some level of risk involved. As a result, you should expect short-term volatility to affect the savings held in a Stocks and Shares JISA and keep in mind that values can fall. However, there are many investment products to choose from and you can pick one that matches your risk profile. Please get in touch with us to discuss investment risk and what is suitable.
When should you use a Stocks and Shares JISA? If you’ll be saving for more than five years and are comfortable with investment volatility.
Finally, a pension isn’t usually something thought about until you reach adulthood, but you can open one in the name of a child. For most families, a pension isn’t an appropriate option for creating a nest egg, but for others, it is worth considering.
You can contribute up to £2,880 per tax year to a pension for a child, which will increase to £3,600 once tax relief has been applied. So, you could add up to £64,800 into their pension before they even start earning themselves. Once they have a job, they can take over the pension and continue to make contributions.
The benefit of starting young is that the money will be invested for longer. As withdrawals can’t be made, compound interest will grow over time to help the savings go further. It can mean they have less pressure to add more to their pension during their working career with a foundation already built.
Of course, the drawback here is that they won’t be able to access the pension until they’re 57 at the earliest, and this age is expected to rise in the future. So, it can’t be used to help them purchase their first home, pay for driving lessons or support them if they’re struggling financially before retirement age.
When should you use a pension? If you’ve used up the JISA annual allowance and are looking for very long-term ways to save a nest egg tax-efficiently for your child or grandchild.
You don’t have to choose just one of the options above. In fact, you can take advantage of all three to build nest eggs that will suit your children or grandchildren at different stages of their life. If you’d like to discuss the steps you can take to lay a strong financial foundation for the next generation, please contact us.
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change in the future.