I’ve been asked twice this month about options for investing for children, specifically for Grandparents of very young children. One of these times of course was for little Jackson Strong, the other by a friend, as her Father wants to give money to her children.
So I thought I would give a summary here of what can be done, although not giving specific investment advice about where to invest the money – for that, you need to speak to me!
Tax and savings
Most generally and for small amounts, it makes sense to save in the child’s name, rather than parents / grandparents.
This means interest earned is generally tax-free (up to certain limits) as children get the same tax-free allowance as adults. So, whether you are saving into a Junior ISA (JISA) or an ordinary savings account your child’s interest will remain tax-free up to the HMRC personal allowance limit, set at £11,000 for 2015/16.
The exception to this is the so-called ‘£100 rule’. This stipulates that any amount of interest exceeding £100 that results from a payment made by a parent / grandparent to a child must be taxed at the parent’s tax rate. This rule is applied to almost all children’s savings accounts except JISAs – which are totally tax-free in the same way as adult ISAs are.
Bear in mind that any account held in a child’s name becomes legally theirs to do with as they wish at age 18! And as we all remember, that is not always the best age to have a large lump sum to hand!
The alternative is to hold the money in your own name (see below) or set up a Trust – but I am not going to into detail about that today.
JISA – Junior ISA
- These work like an adult ISA
- They are tax-free, but are for the long-term.
- They replace the Child Trust Fund (CTF) and if a child was not eligible for the CTF they can have a JISA.
- JISAs have an annual savings limit of £4,080 (current tax year) which can be held entirely in cash, stocks and shares or any mixture of the two.
- Anyone can pay into the JISA although a parent or legal guardian must set it up and funds cannot be withdrawn until the child turns 18.
- As an added bonus, JISAs can be held concurrently with an adult ISA between the ages of 16 and 18, giving the child a boosted tax-free allowance for two years.
- Only two JISAs may be held per child at any one time – one cash, one stocks and shares.
- Children’s savings accounts offer varying interest rates depending on your chosen bank or building society and the tax rules stated earlier apply.
- Be warned – you will have to apply for gross interest to be paid by completing a form R85, the bank should provide this to you!
- They allow instant access to the funds at any time, unlike JISAs which effectively lock the money away until age 18.
- They can be added to by anyone, anytime, without limit.
- They can be useful for teaching children financial housekeeping as the child is given access to the account at age seven and can pay in and out of the account as they grow. I remember how nice it was to save in my Nationwide Teddy!
- NOTE however, regular accounts that pay good interest rates tend to have lower savings limits than JISAs with many providers cutting interest rates if deposits exceed a certain amount.
Pensions – forward planning by 55 years!
- Child pensions allow parents to pay into a pension for their child from the moment they are born.
- Like adult pensions, child pensions are hugely tax efficient and are eligible for 20 % tax relief meaning that you only have to pay in £2,800 per year to receive £3,600 back.
- The maximum that can be paid per annum is £2,800.
- They are incredibly attractive if you are the kind of person who really enjoys planning ahead and you want to help your child enjoy their twilight years.
- At an assumed growth rate of 5%, 18 yearly payments of £2,800 would equal £1,053,405 by the time your child reaches 65! Now that’s proper forward planning!
- Like all pension plans however, they cannot be accessed until 55 at the earliest and many see this as a real downside.
- It is perfectly possible to save money in your own name for your children or grandchildren.
- The advantages are that you will be able to control the money, even when the child turns 18.
- The disadvantage is that the money will be taxed on you in the normal way.
- It’s also worth considering that the child has no automatic legal right to the money and this could cause problems in the event of death or divorce.
What’s best you ask? …. Well… what’s it for?
- What you are saving for and therefore the term. A Car? University? House deposit?
- How do you feel about access? At 7, 18 or retirement?!
It’s likely to be best to consider a mix of a few things, but bear in mind most offer really poor cash returns, so shop around for the best deals and remember you can’t beat the excellent tax efficient growth a JISA can offer (and it can convert into an adult ISA).
Hope this helps some of you!