Don’t know your JISAs from your ISAs? Let’s break down your options for saving for your children’s future.
Brits are not known for their saving prowess, in fact, four out of ten Britons today have savings of less than £100 in their savings accounts. Hardly setting a good example for children to follow!
If you have children (I have three) or are looking to start a family, then you’re probably familiar with the concept that children will cost you money… (Sorry to break the bad news to you!)
Not only is bringing up kids expensive, but many parents will want to teach their children about finance. Furthermore, parents will want to provide their children with an ideal financial start to their lives by saving some each month to build up a little nest egg so they can crack it open at adulthood.
But which savings option is the best for your children? There are several to choose from and here is a summary of the different ways you can save.
Junior Individual Savings Accounts (JISAs)
During the 2017/18 tax year, parents can save up to £4,128 tax-free into a JISA for their child. You can decide whether you want to invest in stocks or shares or only cash – or maybe you want the JISA to have a combination of them both, all three options are there for you to decide.
Considering that you will probably be saving for your kids over several years, financial experts typically recommend investing in stocks and shares JISA as these historically offer more significant financial returns on your kid’s investments, often outperforming cash long-term. As always there is a caveat – with stocks and shares your investments are at risk as they can either rise and fall over time.
One important factor to note with JISAs is that neither you or your child can touch the JISA savings until your child reaches 18 years of age. In theory, you’ll manage the money for them by paying in deposits or moving it to another provider offering higher returns – but that is as far as it goes.
You cannot withdraw any funds, and even from 16 your child can manage the account if they want to – at age 18 the money is theirs, you cannot tell them what to spend the money on. So, if they come of age and wish to blow it all on a party, there’s little you can do to stop them!
Let’s hope they put this start in life to good use!
Pensions (yes, even for children)
If you do consider long-term as the only option to set up a nest egg for your children, then you could contemplate paying into a pension pot for your child.
OK, they will not be able to access their pension savings until the age of 55 or even later if pension rules change in the future. However, any contributions you make on their behalf will benefit from basic tax relief at 20% (again, possible to future changes).
The maximum each year you can pay into your child’s pension is £2,880 – however, the tax relief you obtain on doing this (£720] means that you can save £3,600 each year.
Children’s Savings Accounts
Maybe you prefer to have a little more access to your children’s money and with little to no risk. If this sounds more like you – then a child savings account is an excellent way to get started. Some children’s savings accounts will limit the amount you can withdraw, may contain notice periods to remove funds, or lock in the savings for a period of time, for example, yearly savings bonds.
Whichever access you decide on, for the 2017/18 financial year children are allowed to earn up to £17,500 from savings without having to pay tax on it. Now, this may sound silly, but like adults, children get a personal allowance of £11,500 tax-free on income each tax year. Plus they can obtain the following:
- £5,000 starting rate for savings (simply put, they can earn £5,000 interest tax-free)
- £1,000 Personal Savings Allowance (PSA)
There are sadly caveats with the amount of interest you can earn without having to pay tax. If a parent or step-parent give the money to a child and the interest is over £100 a year, then you must pay tax on the WHOLE amount. You can read more about how much you pay here.
Using your own ISA allowance
Maybe you’re concerned about your children spending the hard-earned nest egg you put aside for them when they come of age. If you want your children’s savings to stay in your name then why not utilise your own ISA (Individual Savings Account) allowance?
Although taking your tax-free savings allowance away from yourself, the money saved is in effect yours – allowing to distribute your savings to your children when you feel they deserve or need it, whether 18, a deposit for a house or even a daughter’s wedding!
For the current tax year, you can save up to £20,000 tax-free in your ISA, either in cash, stocks and shares or peer-to-peer lending through an Innovative Finance ISA (although these do have a higher risks to your capital).
No matter what you decide, get saving for your child!
JISAs, ISAs and limited access children’s savings accounts pay much higher rates of interest because you’ll need to commit to putting a sum away each month. Pensions provide you with tax relief and will set your child up for when they retire.
Should you need regular access your kid’s savings, then consider a regular easy-access savings account. Yes, the rates will not be as high as other options, but look it at from the perspective that you’re still putting funds aside for their future.
Before you make any financial decisions for your children, always do your research, or talk to a financial adviser.
David Bailey-Lauring is a small business owner and dad of three, from Brighton, UK; he writes about tech, finance and entrepreneurship.