10 minute read
Investing little, and early, can really make a difference to a child or grandchild’s nest egg when they reach adulthood
Weigh up carefully whether you want the extra tax benefits of a pension or the easier, quicker access of a Junior ISA
Showing your children or grandchildren the benefits of any type of investing early on can help them develop good financial habits of their own
BACKGROUND
‘Nepo babies’ have been in the media spotlight recently. Those children who slide effortless into fabulous careers, seemingly due to their parents’ fame, connection…and money.
But there’s another group of celebrities who have declared they won’t be giving their children a Succession-style helping hand, particularly on the financial front. Television and talent producer Simon Cowell is quoted as saying he won’t be leaving his estimated £496 million fortune to his son – preferring a charity instead. Bill Gates and his ex-wife Melinda are said to be leaving their three children financially stable by any standards – but the reported $10million inheritance will be just a fraction of their estimated wealth of over $100billion.
Whatever your feelings about leaving your kids or grandkids an inheritance in a Will, setting up investments for them early in their life is a different matter and would seem to be a prudent financial move. Investing even a small nest egg for a new baby, could, with regular top ups, make a real difference to their chances of buying a house, paying for an education or even retiring early.
“The earlier the better,” says Van Greaves from NBL. “But what you choose to invest in needs expert advice, as it can make a massive difference between how the money grows by the time your child wants to use it.”
2022 figures for raising a child in the UK up to the age of 18 were nearly £160,000 for a couple and over £200,000 for a lone parent.1 Making contributions into saving for them shouldn’t be a burden on top of this – but it’s fair to say even very small amounts can make a difference.
Of course one of the great things about setting up an investment for a child at an early age, is that grandparents, godparents, family and friends can all contribute. And taking the child along for the ride will also benefit them. If they see people making small deposits, it will encourage a savings habit, and help the child understand the importance of investing for the long term.
So whether it’s for their first home, driving lessons or establishing themselves in a career, here are two of the best ways to lay a financial groundwork.
Junior ISAs, or JISAs, were introduced in 2011 as a tax-free way of building up a savings pot. For the 2023 to 2024 tax year, you can save up to £9,000 a year for an under-18 year old living in the UK.
Note that JISAs replaced Child Trust Funds in 2011. You can’t have both – but you can transfer the Fund into the JISA.
Like regular adult ISAs (which JISAs actually convert to once the child reaches 18), there are two types of JISA – cash savings, and stocks and shares. For the cash, interest will be tax-free, for the stocks and shares, you won’t pay any tax on capital growth or dividends. And you can have a mix of both.
Only parents or guardians with parental responsibility can set up a JISA, but anyone can make deposits into it – a great recommendation for birthday or Christmas money from friends and family. The money completely belongs to the child who can take control of the account at 16 but not withdraw money until they’re 18.
A little baby is likely to be more than half a century away from retirement, but a pension is the second great way to invest for them. Because they won’t draw on the money for decades, depositing even very small amounts over the years can lead to a satisfying pot of money when the time comes.
The key thing about pensions – and it’s the same for adults – is that the UK government gives generous tax relief on them. Parents and guardians can set up the fund, but anyone can pay into it to the tune of £2880 a year – once the government adds its tax relief that goes up to £3600. Making these contributions over the years is also an excellent way to reduce your own inheritance tax liabilities.
Once the child turns 18 they gain control of the pension, although they won’t be able to access the funds until they turn 55 – and this will rise to 57 in 2028.
Again, setting up a pension can also be a good education for a child or grandchild. Too many people leave pension planning until too late to make a significant difference to their retirement. Opening this conversation and creating a habit early on will only benefit them once they start to earn their own money and make independent financial decision.
Of course pensions and stocks and shares JISAs are investments, and their value can go up as well as down. There are a confusing number to choose from on the market, and the best way to understand the rules is to sit down with your independent financial adviser.
1Child Poverty Action Group – https://cpag.org.uk/sites/default/files/files/policypost/COAC_summary_recommendations.pdf
