How can I invest for my children?

27 April 2023

At a glance

  • Saving a nest egg can give your children a great start in life – and it doesn’t have to break the bank.
  • The longer the investment has to mature, the greater the potential benefit for your children will be.
  • A financial adviser can help you discover the smartest ways to save for your children or grandchildren.

They say you can’t put a price on family, but just how much does it cost to raise a child? Raising a child from birth to 18 in 2022, including household and childcare costs, stood at £157,562 for a couple and £208,735 for a lone parent1.

With the general costs a child brings, as well as the increased cost of living, many parents feel squeezed to make ends meet, let alone think about funding future costs like a car, university, or a deposit for a house. But building a nest egg for your kids doesn’t need to break the bank and could make a huge difference to their future.

Parents, grandparents and other family members are often keen to give children a headstart in life for when they reach a certain age. Buying a first home or helping them to start their own business can be made far more affordable by starting to save early. Introducing the concept of saving and the benefit of investing for the long term to your child at an early age is also a great way to encourage smart money habits long before they become adults.

How do I save for my children’s future?

As your child gets older, so do their expenses – from driving lessons to tuition fees to the deposit for their first home. Here are several saving options that can help their money potentially grow as fast as they do. And since the money is locked away until they’re older, it has years to ride out any bumps in the road:

Junior ISAs

The tax-friendly Junior Individual Savings Account (JISA) is a very attractive option.

Anyone can pay into the JISA – parents, grandparents, godparents, friends or other family members, although only parents and legal guardians can actually set one up. Like all ISAs, you won’t pay Capital Gains Tax or Income Tax on them.

There are two types of JISA; a Junior Cash ISA and Junior Stocks and Shares ISA. You can pay up to £9,000 in the 2023/24 tax year into a JISA.

Money held in a JISA is locked in until the child reaches 18, after which it can be converted into an adult ISA and continue to enjoy the same tax advantages.

Pension fund

Starting a pension for a child, many decades away from their retirement, might sound like an odd thing to do, but can make a big difference. Even investing small amounts over decades could grow into a substantial pot over time.

Children can have a pension as soon as they are born. Setting one up can bring significant tax advantages since, as you save, the government adds a generous tax relief. giving a maximum annual investment of £3,600.

Just like JISAs, a parent or legal guardian must set one up but anyone can pay into the pension. Saving this way may help also mitigate an Inheritance Tax (IHT) liability. Payments from grandparents, for example, may be covered by the annual £3,000 IHT gifting allowance, or the exemption for payments made out of income.

Do children pay income tax on their savings?

Technically, yes. Children are liable to pay tax on savings, as they have the same income tax allowance as adults. It’s uncommon, though, as children generally don’t earn money, and their savings don’t tend to earn enough interest to exceed any tax thresholds.

Like adults, children are entitled to a tax-free personal allowance of £12,570 in the 2023/24 tax year. If this income is from savings interest, there are extra tax-free allowances in addition to the personal allowance, allowing a child to potentially earn up to £18,570 tax-free in the 2023/24 tax year. This could be increased if you include the dividend allowance of £1,000.

Discover the smartest ways to save for your children by talking to a financial adviser. They can support you in planning for your children’s financial future. Get in touch with your SJP Partner today.

The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested

An investment placed into funds (equities) would not have the security of capital associated with a deposit account with a bank or building society.

The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.

Please note that St. James’s Place does not offer Cash ISAs.

Source:

1Child Poverty Action Group, 2022

SJP Approved 20/04/2023