Every parent wants the best for their children, not just now but throughout their lives. It is natural to worry about the future, about what will happen when they have flown the nest and even when you are no longer around.
What if they don’t get the same opportunities you have had in your adult life? What if work is scarce and the cost of living high? How will they get on the property ladder with prices soaring, and what security will they have with pensions disappearing?
As a parent, you want the time, energy, money and love you invest in your children to last a lifetime. Putting money aside in the form of savings and investments to build up a nice little nest egg for their future is one way of extending financial support into later life.
There are lots of options for saving for your children’s’ futures. Junior ISAs are popular because, like standard ISAs, earnings from interest are tax-free. They have to be opened by parents but thereafter anyone can contribute, with the current annual savings limit set at £4,260.
Standard savings accounts for children remain common, although poor rates of interest coupled with the tax charged on interest have seen their popularity dwindle in favour of Junior ISAs. If the interest on money you as a parent have put into your child’s savings account amounts to more than £100 in a tax year, you have to pay Income Tax on it. This does not apply to money given by grandparents, friends or relatives.
If you are really looking long-term, there are even child pensions that can be opened from birth. The maximum contribution is £2,880 a year which is topped up by the government with 20% tax relief up to £3,600.
Making a decision between different savings products can be confusing, especially when you are weighing up something as important as your children’s future. At Capital, we find the best place to start is to sit down and think carefully about what it is you want to save for, what kind of financial support you want your investment to provide. Once you have done that, we can help find the right way to put money aside, for you and your family.
Here are three questions to ask when you start considering making savings for your children.
1. When do you want your child to be able to access the money?
This is usually the first consideration for parents. Like many, you might want to save to give your child a handy head start in life. To give them some financial independence when they first leave home or to help them out when taking their first steps towards a career. Junior ISAs are perfect for this purpose. The child can take control of the account from age 16, although they cannot make any withdrawals until they are 18. Any withdrawals they do make are completely tax-free, and if they choose to keep saving, the account automatically transfers into a standard ISA.
On the other hand, you may be worried that your child won’t be responsible enough to take control of a considerable lump sum of money at 18 and instead would prefer to manage the financial support you give them until a later date. In that case, child pensions make an interesting option because withdrawals cannot be made by the pension owner (i.e. the child) until they turn 57. Rather than providing a helping hand at the start of adult life, child pensions are therefore aimed at parents taking a much longer view who want their children to be comfortable in their later life.
2. Do you want to save for a specific purpose?
Many parents have a specific event or other reason in mind when they contemplate saving for their children. You might be thinking ahead to university fees, to buying the first car, putting a deposit on a house, paying for a wedding or similar.
A Junior ISA lets you do this in a way that ultimately gives your child control over how they spend it - although if you have a house deposit in mind, travelling the world may be a bigger draw for them. And again, the automatic transfer to an adult ISA means they can pick up the reins and add to the savings pot themselves, for as long as they like.
3. Are you worried about Inheritance Tax?
If you are in a comfortable financial position - specifically if you and your partner’s net worth, including your home, amounts to more than £650,000 - you may be worried about the Inheritance Tax bill your children will face when you and your partner die. Although this might sound a very long way off, and seem a bit morbid, it is actually a really good reason to think about saving for your children from a young age.
A child’s pension is a really good vehicle to use if Inheritance Tax is a concern. When it comes to making the tax calculations, whatever is in the pension fund is considered outside the estate. The downside to a child pension is, only 25% of the total amount can be withdrawn as a tax-free lump sum. The rest is taxable at the pension holder’s rate of income tax, which as things stand would be much less than the Inheritance Tax rate. Things could, however, change in the intervening years.
The other option is to use a Lifetime ISA to lock up money tax-free for your child. There are various rules and limits on how much parents can gift to their children without being liable for Inheritance Tax. By putting money into an ISA, you avoid the complication and can contribute up to the saving limit annually without any tax risk at all. The only issue here is that Lifetime ISAs haven’t enjoyed a huge take up to date and could be withdrawn in the future.
Wanting to protect and take care of your children is a natural instinct for any parent, and not one that disappears the moment they turn 18. When deciding on how to put some money away to help them in the future, your priorities are:
- Using a savings vehicle that best suits your objectives.
- Avoiding wherever possible unnecessary tax liabilities - you want your money to go to your child, not HMRC.
- Getting the best possible returns on the money you invest.
For more information about the benefits of saving for your children and choosing the right saving and investment products for you to save for your children's future, read 5 reasons to stop your children’s gifts going up in smoke at Christmas – help them to save instead.
At Capital, we understand you want the best for your children. If you would like any further advice on savings, speak to one of our friendly advisers today, and they will happily talk through the options for your particular circumstances.
*All data is correct of the time of publishing - March 2019.