All parents want to give their child the best head-start in life.
If you are looking to save for your child’s future to help with goals such as paying university fees, buying their first car or for a house deposit then at Four Wealth Management, we can help you work out the best option to help you maximise the most of your savings.
If you have a lump sum to invest for a child then we have outlined some tax-efficient options below. These accounts can also be opened when investing monthly rather than a lump sum.
3 things to consider when investing for a child:
Timescales – how long will it be until your child will need to access the funds?
Risk – how much risk are you prepared to take to potentially achieve better returns on your investment?
Tax – which investments will be the most tax-efficient?
A financial adviser at Four Wealth Management will work with you to establish your short and long-term goals for your child and recommend investments that are suitable to help you achieve these. They will also explain to you when your child can access the funds and if there are any inheritance tax implications.
Book a no-obligation meeting online now or call us on 0117 973 0500.
Junior Stocks & Shares ISA
A Junior Stocks & Shares ISA is similar to an adult Stocks & Shares ISA. It is a tax-efficient way to invest for your child’s future. Any growth in the ISA is free from Income Tax and Capital Gains Tax. A child cannot access the money until they reach the age of 18. Because your child cannot withdraw any growth before the age of 18, then any investment growth would be automatically reinvested for them so they would have the potential to achieve even greater long term returns.
A Junior Stocks & Shares ISA is more risky than a Junior Cash ISA as stock market values can fluctuate and your capital is at risk. However, your child is likely to have a long time period to invest over so a Junior Stocks & Shares ISA has the potential to provide far greater returns over a long-time period than a Cash ISA can offer. In the current climate, even with rising interest rates and greater returns on cash, the inflation rates are rising higher than interest rates which means Cash ISAs are losing money in real terms.
The maximum you can contribute to a Junior ISA per tax year is £9,000. This can be invested as a lump sum or as monthly payments.
Pensions for Children
A pension can be set up for someone under the age of 18.
It may seem bizarre starting a pension for a child as their retirement is decades away and they cannot access the money until at least the age of 57 (this age may rise in future). However, a pension is a good way for you to invest in your child’s future tax-efficiently due to the tax relief that is offered by the government on pension contributions.
The same as an adult pension, a child’s pension benefits from automatic pension tax-relief.
The maximum that you can contribute to a child’s pension per year is £2,880. This is automatically topped up by the government to £3,600.
As the investment time frames on a child’s pension is decades then you can consider taking more risk with the investments aiming to maximise your investments over the long term. The pension investments will hopefully grow in value and benefit from compound interest.
For example, if you made an annual contribution of £2,880 into a childs’ pension and received the government tax relief taking the total to £3,600 per year, assuming a modest 4% investment growth per year then by the child’s 18th birthday their pension pot could already be worth around £95,000. This shows the power of compound interest. Even if you stop contributing at the age of 18, by the time your child reaches the age of 65 assuming a continuing rate of 4% the pension pot could be worth over £620,000.
These figures are examples only and they are not guaranteed – they are not minimum and maximum amounts. What you get back depends on how your investment grows and the tax treatment of the investment. You could get back more or less than this.
Trusts
If you are planning on gifting a large lump sum to a child (or children) then a trust might be most suitable for your circumstances. There are many different types of trust and trust law is a complex area. A financial adviser at Four Wealth Management can let you know which type of trust is suitable for your individual circumstances. Some types of trusts enable you to retain full control over the gift and when your children receive it.
Trusts can be used to reduce the taxable value of your estate and mitigate an Inheritance Tax liability enabling you to leave more to your loved ones and less to the tax man.
Should I take financial advice when investing for my child?
Tax rules and allowances are complex when it comes to gifting money. It can also be hard to know which account or investments are suitable for your child to help them reach their goals. To make sure you are making the right decisions for your child, you can book a no-obligation meeting or call us on 0117 973 0500
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 in a Stocks and Shares ISA will not provide the same security of capital associated with a Cash ISA.
Trusts are not regulated by the Financial Conduct Authority
Cash ISAs are not available through St. James’s Place.
Although anyone can contribute to an ISA or pension for a child only the parent/legal guardian can open them.
