Buying presents for your children and grandchildren can be a challenge. Keeping up with the latest toy trends is tricky, and it’s not always easy to find an age-appropriate gift. Perhaps it’s therefore no surprise that parents and grandparents are increasingly gifting their children cash instead of toys and games.
According to The Times, 40% of parents who gave their children a present between March and June chose a financial gift. Some of these gifts were in the form of investments, and half of the children who received money in any form said they’d be happy to save or invest their gifts.
Whether you think your child or grandchild would appreciate having savings in their name now, or you want to prepare for when they will, it’s always a good time to start building a fund for them. Here are five types of savings and investments you could consider.
1. Regular child’s savings account
There are many traditional savings accounts available, and a bank or building society account is easy to set up and simple to manage.
You can normally open an account for any child up to 18 years old with only £1. And, as up to £85,000 saved in a bank or building society is covered by the Financial Services Compensation Scheme, you know the cash is safe.
You could use the account to teach your child how to handle their money, as they can typically start managing the account from the age of seven.
However, savings accounts tend to have low interest rates. At the start of September, financial analysts Moneyfacts revealed that the average easy access account interest rate is just 0.23%, meaning just £23 interest for every £10,000 you save.
Low interest rates mean these savings are unlikely to keep pace with rises in the cost of living. So, if you’re saving long term for a child in a traditional account, the value of their savings is likely to diminish in real terms.
2. Cash Junior ISA
Junior ISAs are useful if you want to build up a lump sum for when the child turns 18. Although only a parent or guardian can open a Junior ISA, anyone can make contributions to it, up to the annual subscription limit. The child can run the account from age 16, but can’t access the money until they turn 18.
Cash Junior ISAs are easy to contribute to and can result in a good nest egg for your child or grandchild. In fact, earlier in 2020 the Chancellor more than doubled the amount you can contribute to a Junior ISA, so now you can save up to £9,000 a year.
Of course, the main benefit of a Junior ISA is that any interest you receive is paid tax-free. However, Cash ISA interest rates tend to be low, which means that your returns may not keep up with rises in the cost of living.
Also keep in mind that your child will get access to the money when they turn 18. At that time, you lose control of the savings and your child can use them as they wish. It may make sense at this time to involve them in your financial planning discussions so you can make decisions together on how the funds may be used.
3. Stocks and Shares Junior ISA
One alternative to a traditional Cash ISA is a Stocks and Shares ISA. These let you invest in shares, bonds, and other eligible investments on a child’s behalf.
Annual subscription limits are the same as with a Cash ISA, and you don’t pay any tax on income or capital gains from investments in an ISA.
Stocks and Shares ISAs tend to produce higher investment returns compared to the interest earned from a Cash ISA – although your capital is at risk.
For example, The Times calculates that, with an average 5.5% growth rate, £9,000 invested in a Stocks and Shares ISA each year would produce a lump result of £279,924 when your child or grandchild turned 18.
This compares to a Cash ISA where an average rate of 1.95% would see the same £9,000 annual contribution turn into just £195,000 in 18 years.
Remember that the value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
As with Cash ISAs, you can only have one Stocks and Shares Junior ISA per child and, again, the child gains control of the money when they turn 18.
4. A trust
You could set up a trust for your child or grandchild. Trusts can hold many forms of capital at once, which can be useful if you have cash, shares, and equity you want to pass on to a child. They can also reduce the risk of your child losing access to those assets in the case of bankruptcy or divorce.
A trust also holds the wealth your assets generate. This may be taxed as your child’s income instead of yours, resulting in tax-efficient growth.
There are many types of trusts to choose from, including bare and discretionary trusts. Consider speaking to a financial adviser to determine the best kind of trust for your child or grandchild.
One option that some parents and grandparents have taken is to start a pension for a child.
Even small contributions can accumulate considerable investment returns over the decades, which can help set your child or grandchild up for their retirement. You can make contributions whenever you want, and the pension will automatically transfer to your child once they turn 18.
Pensions allow you to save tax-efficiently. Any contributions you make, up to a limit of £2,880 a year, are topped-up by the government meaning £3,600 will be invested.
However, your child won’t be able to draw from their pot until they are aged 57 or older. So, a pension won’t be appropriate if you want your child or grandchild to be able to access the money you save earlier, perhaps for their university education or to buy a first home.
Also keep in mind that a pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.
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