Setting up a savings plan is something our advisers are regularly asked about. But where do you start if you’re a parent, grandparent, or family friend wanting to set up an investment plan for babies or young children? James Wright, Independent Financial Adviser, outlines the basics of some savings plans currently available.
Children’s savings accounts in a bank or building society
Minimum investment is usually £1 but varies considerably. It usually needs to be opened and operated by a parent or guardian (not the grandparent). Interest rates vary but regular (monthly) savings plans usually give a higher rate than one-off deposits, and the same may apply if the adult has a qualifying account with the same provider as the child. If parents give cash gifts to the child’s account and interest earned is greater than £100 p.a. this could be taxed on the parents.
Junior Cash ISAs (a JISA)
Usually £1 minimum investment but varies according to provider and account. Maximum investment £4,260 per annum and relatives can contribute to a JISA on top of their own £20,000 ISA limit. Rates of interest are normally higher than a bank or building society account, but they vary considerably. Account usually needs to be opened and looked after by a parent or guardian, ie not the grandparent. The savings are free from Income Tax and the child can withdraw their cash after they are 18, after which time the cash remains tax free. A child can have only one JISA.
Junior Stocks and Shares ISA
Similar to a JISA (above) but requires a monthly minimum investment of at least £25. Growth is dependent on the funds selected – can be high or low risk. Funds are free from Income Tax and Capital Gains Tax. The account needs to be opened and looked after by a parent or guardian.
The minimum value that can be bought is currently £100, but this will change to £25 from April, as will the range of adult friends and relations who can buy Premium Bonds on behalf of a child. No interest is earned, the value of the bond remains static for as long as it is held. There is no tax due on any winnings, and the parent or guardian must look after the account until the child turns 16.
Suitable for investing larger sums for an individual: a typical initial outlay is over £50,000. One or more trustees are legally responsible for protecting and investing funds appropriately for beneficiaries (such as children). Growth will depend on the investment funds chosen, and access will be dependent on the terms of the trust or can be at the trustees’ discretion. Setup fees will be incurred, and probably other fees as additional advice is needed. Seeking independent financial advice is strongly recommended.
These can be set up for as little as £20 per month, to a maximum of £2,880 (net) per year. Like adult pensions, a child’s pension is eligible for 20% tax relief, so if a parent or grandparent pays in £2,880 each year the government will top it up to £3,600. Like all pensions, it cannot be accessed until at least 55, by which time it will hopefully have matured to a sizeable sum!