Whatever hopes and dreams you have for little Johnny or Jemima, it’s reassuring to know that you can help make them happen by setting your child or grandchild on the path to financial security when they are young.
Whether you want to plan for school fees, contribute to their first home or set them up for a comfortable retirement, knowing how to make the most of your savings can make the journey much easier.
But before you get started, there are some things you need to know.
Forget the fairy tales, here are the facts you need when investing for your child or grandchildren.
1. Children do pay tax, just like us
Contrary to popular belief, children are liable for tax, although few are fortunate enough to earn enough on their savings and investments to actually pay any.
There will only be tax to pay by your child if they earn above their personal allowance. The basic personal allowance is currently £11,850, so there won’t be any tax to pay as long as all the interest they earn does not come to more than £11,850 in the current tax year.
The rules are tougher though if the interest is earned on money from a parent. If your child earns more than £100 in interest in any tax year from money you have given them, then you will find that you are personally liable for tax on the interest earned, if it’s above your personal allowance.
The good news for grandparents, aunts, uncles, godparents and anyone else who gives money to a child, is that the same tax liability does not apply.
2. You’re not stuck with their Child Trust Fund
If your child was born between 1 September 2002 and 2 January 2011 they are likely to have a Child Trust Fund (CTF). Although no new CTFs are being issued, you, family and friends can still pay into the account until your child reaches 18.
However, you don’t have to. Junior ISAs (JISAs) have now replaced CTFs. They’re not dissimilar in that they are available to children under the age of 18 and are also long-term, tax-free savings accounts.
While it’s true that your child cannot have both a CTF and a JISA, you can now transfer the money into a JISA instead. The benefit of doing this is that some JISA providers pay a higher interest rate than is available on CTFs and you can easily switch between JISA providers if you want to.
3. They’re never too young to have a pension
Kids can, and should ideally start a pension as soon as possible. Starting a pension for a child is a smart move and one that is proving increasingly popular among parents who are already planning for their child’s twilight years. According to HM Revenue & Customs, about 60,000 under-18s already have pension plans in place.
You can start saving into a Junior SIPP as soon as your child or grandchild is born. Each child can have a total of £3,600 a year, or £300 a month, saved into a pension. Just as with your pension, the government automatically tops up payments you make by 20%, so for your child to have the maximum £3,600 a year, total contributions only need to come to £2,880.
Calculations show that if you were to invest £240 a month into a Junior SIPP just for the first 18 years of their life without them adding another penny to it when they were old enough to, then assuming 5% annual growth and 0.75% in charges, they would have a very impressive £567,257 pension pot at the age of 65.
Of course, it’s pretty much inevitable that tax rules and reliefs will change between now and your child’s retirement, and you have to factor in inflation, which will erode the spending power of any money built up in the pension, but you cannot doubt that this is the ultimate way to make sure your child has the makings of a secure financial future – even though you won’t be there to see it.
4. Grandparents can gift money tax-free
While parents who save or invest money on their children’s behalf can face a tax bill if their child’s savings or investments earn more than £100 in any tax year, the same does not apply when you’re a grandparent gifting your grandchild money.
Given the length of time ahead of them, investments in funds are especially worthwhile for children. You invest in your name then add the child’s name or initials to the account so you can ‘designate’ or identify which assets are theirs. Then you can transfer the assets to the child when they reach age 18. Unlike ISAs and pensions any investment growth will be subject to capital gains tax but this can be often be offset by the child’s tax allowances.
5. Yes, your child/grandchild could blow their savings
With a CTF or JISA, as soon as they hit 18 your child’s/grandchild’s account is automatically rolled over into an adult ISA. And understandably it’s the idea of this that sets off full-blown panic in many doting parents and grandparents.
What if all those years of saving and investing end up getting blown on a motorbike/a year out/something totally inappropriate and not the educational/property buying/training purposes you’ve had them earmarked for in your mind for the past 18 or so years?
Well, if you have a willful 18-year-old on your hands, then you might find yourself fighting a losing battle. But making a point of talking about your child’s savings and investments with them from as early an age as you can, getting them involved and showing them how it’s growing nicely over the years is a good way to instill a savings habit in them that – you hope – will pay off.
The value of investments and the income from them can go down as well as up, so you may not get back what you invest. Tax treatment depends on individual circumstances and all tax rules may change in the future. Withdrawals from a pension product will not be possible until you reach age 55. Junior ISAs are long term tax-efficient savings accounts for children. Withdrawals will not be possible until the child reaches age 18. A Junior ISA is only available to children under the age of 18 who are resident in the UK. It is not possible to hold both a Junior ISA and a Child Trust Fund (CTF). If your child was born between 1 September 2002 and 2 January 2011 the Government would have automatically opened a CTF on your child’s behalf. If your child holds a CTF they can transfer the investment into a Junior ISA. Please note that Fidelity does not allow for CTF transfers into a Junior ISA. Parents or guardians can open the Junior ISA and manage the account but the money belongs to the child and the investment is locked away until the child reaches 18 years old. This information does not constitute investment advice and should not be used as the basis for any investment decision nor should it be treated as a recommendation for any investment. Investors should also note that the views expressed may no longer be current and may have already been acted upon by Fidelity. Fidelity Personal Investing does not give personal recommendations. If you are unsure about the suitability of an investment, you should speak to an authorised financial adviser.