Saving for a child today is a wonderful gift for their future

We all know that it can be difficult for the next generation to achieve certain milestones and getting that first step on the housing ladder is probably the most obvious one.  When we work with our clients, we are often asked how they can put something aside for their children or grandchildren.

Recent research shows that, on average, parents in the UK are putting aside £42.45 a month for each child. Source: L&G Investments

Think about the purpose of the savings

Do you want these to be used for potential university costs? Or would you rather that they were used for a deposit for a first home?  It is very important for you to be clear about the purpose of the savings, as different wrappers and investments will be more appropriate depending on when access is likely to be required.

For instance, Junior Cash or Stocks and Shares ISAs (sometimes called NISAs) could be appropriate where you wish for the child to be able to access the funds sooner (from age 18), for university costs for instance.  If you wish to think about their longer-term financial wellbeing, a pension may be appropriate however this would not allow access pre age 55 (based on the current pension rules).

Savings towards a child’s future retirement might not be the first thing you think of when considering the various saving options for your loved one, but, it does mean they’ll only be able to access this pension money when they’re a far more sensible age!

Am I limited on how much I can save for my child?

In short no, although there are certain limits on the amounts which can be placed in certain wrappers.  For example, up to £9,000 per child can currently be invested into a Junior ISA (or child Trust Fund if your child has one) and up to £2,880 can be placed into a pension for someone without earned income, such as a child.  The addition of basic rate tax relief tops this up by £720 to £3,600.

Any growth in the child’s pension or ISA is free of tax meaning that it can start to increase very quickly. Like any investment though, it can also go up as well as down.

For example, assuming you invest the maximum into a pension over just 3 years of £8,640 (£10,800 including the tax relief added by the government) and assuming an average growth rate of 8% over 50 years, the child’s pension could be worth £582,000 by the time they get to retirement.

Parents should also be mindful of the tax implications of holding savings in their children’s name as the interest can be taxable as part of the donor’s income over certain thresholds.

In a useful loophole, if the child is aged 16 or 17, they can take out an (adult) cash ISA and save up to £20,000 a year, as well as up to £9,000 in a Junior ISA.

Once I have decided on a wrapper, how do I invest the funds?

If a timeframe is short, i.e. under 5 years until access is likely to be required, a lower level of risk should be taken with the funds.  However, where these are being invested for the longer term (such as in the example of a pension which could have a 60+ year term), a greater level of risk can be considered.

At Fiducia we have a purpose built “glidepath” strategy which looks to reduce the risk of the child’s portfolio as they get nearer the point in time that access will be required.  This ensures that the risk is managed and that the underlying investments are always suitable for the financial planning needs and objectives.

How can I receive advice?

At Fiducia Wealth Management, we strongly believe in the importance of family and assisting the next generation where we can.  As a result, when we look after a family, we do not charge our clients for the management of investments held for their minor children.  Initial meetings are available at no cost and with no obligation.

If you’d like to discuss saving for children or any area of financial planning, then please send me an email at [email protected]