Investments or savings? What’s the best way to safeguard your child’s financial future?
When you see your child dressed up for school for the first time, it’s a stark reminder how quickly time flies. It might feel like only yesterday you were bringing them home from hospital or struggling through their first tooth, but when they walk through the school gates with their backpack and shiny shoes, you can’t deny that they’re growing up fast.
The sooner you start thinking about their financial future, the better. The earlier you start, even with a small regular investment, the more rewards they’ll reap in the future. And getting into the habit of talking about money from an early age and showing them how savings and investments work is the best way to grow financially smart adults.
So, while your little one is learning their letters and numbers, you can start learning too! Find out the most efficient ways to safeguard your child’s financial future.
Savings accounts for children
Many parents set up savings accounts for children. These are a simple way for you to make sure money they get for birthdays and celebrations is safe, and you can add regular contributions to grow their savings if you like.
Children’s savings accounts can be easy access, regular or fixed rate. Generally, the easier the access, the lower the interest rate. If you intend to grow your child’s money in a savings account, a regular or fixed rate account is usually a better option.
Savings accounts are a great way to teach children about savings, but if the parent pays money in, and the interest exceeds £100, the interest earned will be added to their tax bill.
It’s also important to remember that regular savings accounts often have withdrawal and maximum deposit limits.
A Junior ISA works in a similar way to an adult ISA. All funds are tax free, so you don’t have to worry about the £100 rule that applies to savings accounts.
Interest rates are generally higher than an adult ISA and you can choose between cash ISAs or stocks and shares.
Children can’t take cash out of an ISA so it isn’t as good for teaching them about money, but at least you know the money is safe until they reach adulthood! The maximum annual deposit was £9000 in 2021-2.
Investing on behalf of your child
There are two options for making investments on your child’s behalf, a “bare trust” or a “designated account.”
A designated account is in your name and treated as your investment for tax purposes. A bare trust is in your child’s name.
If you make investments on behalf of your children, the pros and cons are similar to investing as an adult. You can potentially make more money from stocks and shares as interest rates on savings accounts are most unlikely to offer the same return. However, any gains or losses are subject to the market so it’s important to remember, if the market goes down you might not get back the money you invested.
A professional advisor can help you find investment funds that are in line with the amount of risk you are comfortable with. Higher risk investments may offer higher potential returns, but you might choose to invest in lower risk funds that feel like a safer place to grow your child’s money.
Setting up a pension for your child
If your little one has just started school it might sound crazy to think about setting up a pension just yet, but there are advantages to getting started early.
Children get an extra 20% tax relief on contributions, for example, and when they draw the pension after they reach 55 there’s a 25% tax-free lump sum.
You can only contribute up to £2880 per year, however, and they will have to pay income tax when they draw on the pension, apart from the tax-free lump sum.
A reason for setting up a pension that often appeals to parents is their child can take over the contributions when they are 18, which is likely to encourage them to start paying into a pension earlier than they would if they’re left to their own devices. But you must accept the fact that your children won’t be able to access the money for a very long time.
Trust funds aren’t just for people you might consider to be extremely wealthy. They are often set up in order to protect assets on behalf of children because money or property held in trust are legally protected and as they no longer belong to you, they usually aren’t subject to inheritance tax.
A big advantage of a trust over other sorts of investment is you can choose how and when the assets in the trust will be given to your children. This means you can avoid handing over large sums of money or property until they reach the age you feel they will be able to make sound decisions about them. The trustees will take care of the trust until they reach that age.
There are a number of different types of trust, so you can choose the type that meets your needs. A bare trust is relatively simple, for instance, your children would get all the assets when they reach the age of 18. There are other kinds of trust where your children can receive an income, but not touch the assets that generate the income, or trusts for vulnerable people or for non-residents.
Seeking independent, expert and professional advice from a financial adviser as your family grows can ensure you maximise every penny both now and, in the future, giving you peace of mind that your loved ones will always be financially protected. If you have any questions, please get in touch. We’d love to help.
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