While we can’t guarantee that our children will become millionaires, there are some simple steps that parents can take to really help set up their children for a good financial future. From Junior ISA’s to setting up a trust, it’s important to know the financial options available. And as well as setting them up financially, it could also encourage loved ones to become successful savers themselves as they get older.
Here, Julie Hutchison, Consumer Finance Expert for Standard Life runs through the options with us…
Top saving financial options to help you save for your child’s future
1. Review your Child Trust Fund
If your child was born between 1 September 2002 and 2 January 2011, they’re likely to have a Child Trust Fund already set-up in their name. Parents can add to this by up to £4,080 a year this tax year – either into a cash savings or investments – and it’s tax-efficient too. Your child will gain access to their account when they turn 18, the perfect time to help fund university or buying their first car.
Child Trust Funds are, however, gradually becoming historic, as they have been overtaken by Junior ISA’s. Parents can transfer a Child Trust Fund into a Junior ISA which does mean more options and choice available so it’s worth considering whether a move is right for you.
2. Set up a Junior ISA
If your child doesn’t qualify for a Child Trust Fund and they are still under 18, or they have one but you want to transfer, then you could consider setting up a Junior ISA. Just like your own ISA, a junior version is tax efficient and, as with the Child Trust Fund, you can save up to £4,080 for them this year. Your child will have full access to the account aged 18.
For more information on Standard Life’s Junior ISA visit: www.standardlife.co.uk/juniorisa.
3. Consider a children’s bank account
A children’s bank or building society account is simple, but it comes with some health warnings. Interest isn’t automatically paid tax-free yet, so you need to sign form R85 to make sure interest earned is tax free. The other banana skin here is where a parent is paying into the account and there’s more than £100 of interest in a tax year. In this situation, tax rules say this income has to be taxed back on the parent. It does mean that bank and building society accounts can be most useful for small amounts of money, or where money comes from a variety of sources.
4. Use your ISA allowance
If you want to stay in control of the money after your child turns 18, you might decide to save into your own ISA so it doesn’t automatically transfer over to them. You can save up to £15,240 into an ISA in the 2015-16 tax year, and it’s up to you how much of that is in stocks and shares or cash, or a bit of both. And unlike a Child Trust Fund and Junior ISA, you can take withdrawals from your ISA when you want to.
5. Start a pension for your child
If you’re not happy with the idea of your child getting their hands on what could be a sizeable sum of money at age 18, how about saving into a pension for them, where they can’t access the funds until they are into their 50’s? Starting a pension for a child suits those who are prepared to take a very long term approach so their loved ones could benefit from many years of the compounding of any potential investment growth.
The annual limit which applies for this type of pension saving is £3,600 and works in a special way. If you pay in £2,880, it is topped-up with tax relief by the government, and becomes £3,600. But your child won’t have access to it until their late 50’s or 60’s – again, this won’t suit everyone.
6. Set up a trust
This one’s more relevant for grandparents. Sometimes, it’s helpful to set aside a pot of money now, but in a way which allows you to control who gets what, and when – for instance if you don’t want your grandchildren to access their money until a certain age. This is sometimes called a ‘trust’. The money is controlled by trustees who manage the investments. There are different types of trust, which give access at different times and ages. The tax issues are complex, and I’d recommend you take legal advice to stay on track here, particularly when it comes to inheritance tax.
It’s not hard to take the first steps towards saving for a child’s future. You just need to decide whether the idea of “too much too soon” gives you sleepless nights, or how ready your teenager might be for financial responsibility at age 18. Will you hand over control and use a Junior ISA? Or do you prefer to delay access or keep control with one of the other options? It’s up to you.
This is not financial advice. Standard Life is not responsible for the content on any external websites. An ISA, Junior ISA, Child Trust Fund or pension which holds stocks and shares is an investment – its value can go up or down and it may be worth less than you paid in. This information was originally written in June 2015 with figures for tax year 2015/16 – tax and legislation can change in the future and the tax position will depend on individual circumstances.
Date: Sept 2015