Starting early can make an extraordinary difference to long-term wealth. Here are some options to help your children or grandchildren.
Building a nest egg for a child or grandchild needn’t be a difficult process. But the earlier you start, the better the outcome will be for them. Not starting saving earlier in life is a common problem, but it can be difficult in your 20s and 30s to get your savings going with so many costs of living. But once you’re older, with kids or even grandkids, you may start to think about whether you can help them get a financial foothold in life to help them when they’re older. Not only does it make sense from an inheritance perspective – the more you give away while you are younger, the less potential there is for tax liabilities – but the earlier you start building them a nest egg then the bigger that egg will be.
If you’re looking to make a start there are some options which can make It simple and tax-efficient.
The Junior ISA or ‘JISA’ should be your first port of call when considering saving for a child or grandchild.
JISAs, like normal ISAs, come in a few forms. You can start with a Stocks and Shares JISA or a cash JISA. Cash JISAs, while offering rates that tend to be better than normal savings accounts, still don’t offer much by way of interest at present. At the time of writing the top cash JISA offers 2.5% interest.
A stocks and shares JISA, while not offering a guaranteed rate of return, will have the benefit of access to investment markets. Because the time horizon of a child is so long (if you start saving for your kids when you have them you potentially have an 18-year window to amass a pot for them), it suits investing in equity markets which have shown to deliver superior long-term returns.
The Government has increased the limit on annual JISA contributions to £9,000 a year. This can be split between a cash account and an investment one, if you prefer. The child can then access the money in the JISA and have full control of it at age 18.
Children’s savings accounts
There are a variety of children’s savings accounts on offer, some from big High Street banks and some from new challenger banks. While the top-choice products offer similar rates to cash JISAs, they are mainly inferior to JISAs because of their lack of a tax wrapper. In reality then these kinds of accounts should only be turned to if you’ve maxed out the annual contribution for your child’s JISA, but still have further money you want to give them.
There is one consideration to make for children’s savings accounts however, from the perspective of education. Often a children’s savings account will give more responsibility to them than a JISA which parents manage. Giving a child their own account to manage can provide valuable life lessons to them from an early age.
Yes, that’s right, a pension. You can open a pension for your child. While the rules governing pensions prevent them from accessing the money before pension freedom age, it could be a valuable alternative or addition to a JISA.
The annual limit you can contribute to a child’s pension is £2,880 per year. This is given 20% tax relief much the same as regular pensions, meaning you can put away up to £3,600 in total. Like a stocks and shares JISA, a pension has the benefit of access to investment markets, which really could help with long-term wealth creation.
The conundrum of picking between a pension or a JISA is that the former can only be accessed at age 55 (which could increase to 57 in 2028), while the latter gives the child full access to the money at age 18.
Unless you’re confident that the child will have a fully responsible mindset with their money at age 18, it may be worth hedging and having a blend of both accounts.
But likewise helping them to understand the importance of what you’ve given them and learning good financial habits as they grow up may put them in a great position to use that money wisely. And with the long-term landscape so uncertain, it may be better to give them something they can access at 18.