Saving for offspring is child’s play
CHILDREN are never too young to start learning the savings habit.
Giving them an early introduction to the world of finance can both teach them about money and build a nest egg – perhaps towards university fees or a house deposit.
And there are plenty of ways of approaching the issue for baby – from the ‘novelty’ factor of buying them some Premium Bonds to looking long term and taking out a pension for their old age.
Premium Bonds can be ‘fun’ if you are lucky enough to experience the thrill of winning a prize here and there, exciting for a child, albeit I know someone, now 68, who was bought £25 worth at birth and claims to have never had a penny back!
More seriously, the average return is 1.25 per cent – not to be sneezed at in this era of low interest rates.
A children’s easy-access savings account is another option.
Some accounts will have passbooks that allow children to take out money (usually in branch, with a parent present), so getting an idea of managing their own savings.
Better still, maybe open a Junior ISA (JISA) where the interest is tax-free.
Each child can have one Junior Cash ISA and one Junior Stocks and Shares ISA during their childhood.
The Junior ISA limit is £4,368 for the 2019-20 tax year.
Lisa Webster, senior technical consultant at AJ Bell, told FTAdviser: “An organised parent who sets up a JISA shortly after their child is born, and pays in the maximum at the start of each tax year, could see their child have a fund in excess of £150,000 by their 18th birthday (assuming subscriptions increase two per cent a year and five per cent growth net of charges).
“A fund that size would make a great 18th present, taking care of university fees and leaving enough for a hefty first house deposit.”
If continued controls after 18 are important, then what about saving for a pension which the child can’t touch until they are 55.
Consumer champion Which? comments: “Many parents worry about what their children might do with their hard-saved cash. With a pension, the child won’t be able to access the money until they reach pension age.”
And another plus. “Saving for retirement from birth gives a long period of time for undisturbed compound growth.”
It is possible to pay in £2,880 a year, which will be topped up to £3,600 under relief at source, even when there are no earnings.
On the downside, the child won’t be able to use the money for any other of life’s milestones, such as marriage. Unlike in an ISA, pension income is taxable.
As a child cannot legally own shares, one other possibility is establishing a bare trust account which can be done quite simply, setting out the initial donor, trustees and who the beneficiary is.
Given a bare trust does not have to be managed by the child’s parents, they are popular with grandparents, an account for the benefit of their grandchildren that they can invest and manage.
As it is not a tax wrapper like a pension or ISA, there is no limit on the amount that can be invested in a bare trust account.
Income and capital gains within the account are chargeable to tax but are treated as belonging to the beneficiary.
Bare trusts also allow withdrawals at any age, as long as it is for the beneficiary’s benefit, so grandparents could invest and make withdrawals to pay school fees, for example.
Once 18, though, the childturned-adult has absolute entitlement to all the capital and income. Trevor Law is managing director of Eastcote Wealth Management, chartered financial planners,
based in Solihull. Email: tlaw@eastcotewealth.co.uk
The views expressed in this article should not be construed as financial advice