Saving for your children / grand-children

Financial Planner
Shaun Brennan DipPFS BSc(Hons)
Shaun has been looking after clients since 1988 and in that time has helped many families and business owners plan for their future and achieve their goals. Shaun was also the pioneer of our inaugural ‘Joined-Up-Expertise’ event for business owners.

We are now over a decade on from when child trust funds stopped being offered and a lot of us, whilst feeling the pinch, also want to ensure that future generations get some extra help and support where they can.  

So where are we now with the best way to build up funds for your children or grand-children?

The official route which replaced child trust funds is to set up a Junior ISA (JISA) in your child’s name and to pay in either a lump sum or start making regular contributions. You can currently pay in up to £9,000 per tax year.  

Were you to invest £750 per month (£9,000 per tax year) up to your child’s 18th birthday you could build up a fund of around £214,512 for a stocks and shares JISA or £169,484 for a cash JISA*.  

A little known quirk of the system also means that once your child reaches the age of 16 they could also pay up to £20,000 into a cash ISA as well as the £9,000 into their JISA; both within the same tax year. This exercise could be repeated at age 17 increasing their ability to contribute for those two years by £40,000.  

Once your child turns 18 the account will convert to an adult ISA and your child will be able to access the money as they wish.  

That’s great! Or is it?  

Let’s be honest, it’s not always sensible to allow an 18-year-old access to this level of money. Thinking back to when you were 18, would you have had the maturity or forward thinking to use such an amount of money wisely? Would you even want your child or grand-child knowing about this money until perhaps a little later?

In reality most people won’t be able to maximise their child’s JISA fund to the fullest year on year but the point still stands; is 18 a good time to receive a financial windfall?  

What other options do you have?  

  • You could just save to cash – but the effect of leaving funds in cash for 18 years is harsh in terms of inflation, especially now.  If you’re going to go to the trouble of setting funds aside, then they need to work harder than that for you.
  • Everyone can invest up to £20,000 per tax year into either a stocks and shares ISA or cash ISA. The money within your own ISA could still be used for your children but having the money in your name would allow you to maintain control over how, when and for what the money could be paid to your children.  
  • A more balanced approach might be to invest a smaller amount into the JISA each year to give your child a smaller financial windfall at 18 but invest the rest within your own ISA giving you control over when further money is released. With modern investment platforms it is now very easy to earmark money for your children within your own ISA.  

What are the main benefits of using ISAs and JISAs?

  • Tax free income and growth within the ISA/JISA;
  • Flexibility to pay in lump sums and/or regular contributions within the overall prescribed annual limits;
  • The 18-year timeframe of the JISA gives you enough time to take investment risk should you wish to do so and benefit from a long period of compound returns.

Are there any other options?

You can also pay up to £3,600 pa into a pension in your child’s name each tax year. This money will also grow tax free and there is also flexibility to make lump sum or regular contributions.  

However, under the current rules your child wouldn’t be able to access this money until they are aged 57 (and set to increase). This makes these types of investments very much a long-term alternative and not practical for those university / gap year / first house / wedding aspirations.

It is also possible to use trusts, but that’s a conversation for another day!  

* This is based on monthly contributions of £750 and growth rates of 3% net of all charges for the stocks and shares JISA and 0.50% for the cash JISA

The value of investments and the income they produce can fall as well as rise. You may get back less than you invested. Investors do not pay any personal tax on income or gains, but ISAs may pay unrecoverable tax on income from stocks and shares received by the ISA managers. Tax treatment varies according to individual circumstances and is subject to change. Stocks and Shares ISAs invest in Corporate bonds; stocks and shares and other assets that fluctuate in value. The content in this blog was correct at time of writing. Please contact us for further information.

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