As any parent will tell you, bringing up children is not without its financial pressures. Just the day to day costs quickly add up, with another little person in the home to feed and clothe.
But that’s not all. 18 years may seem like a long time, but children grow up all too quickly. And far from wiping their hands of the responsibility as soon as their child comes of age, many parents want to have something set aside to give their offspring the best start to adult life.
According to a survey for M&G last year, almost half (48 per cent) of UK adults said they had saved or invested money for a child or grandchild in the last five years.
The question is, how much is enough, and what is the best way to save?
Early adulthood can be a financially challenging time in any person’s life. Sky high property prices mean that, without help from their parents, many young people are now priced out of housing market until well into their 30s.
And if your children want to go to university – well, with tuition fees currently standing at £9,000 a year, the overall cost of a university education is already approaching £50,000. More than a third (35 per cent) of people who took part in the M&G survey said they wanted the money they saved to be used for education.
So what are your options for putting some money aside to help children when they reach adulthood, and which will give you the best returns? The three most common ways of saving for your children’s future are as follows:
Children’s Savings Account
Most people putting money aside for their children still use children’s savings accounts. Typically, these accounts are in the child’s name, but the money is locked away until they turn 18. At that point, however, it legally becomes theirs.
A big drawback of savings accounts currently is the meagre rates of interest that are available. That has been the case for several years now and shows no immediate signs of improving. While putting money aside regularly over many years will in itself build up a certain amount of capital, low interest rates on savings just mean you could be doing better with your money.
Junior Cash ISA
Just like a normal cash ISA, a junior ISA is a tax free savings vehicle, meaning all of the interest accrued is guaranteed to go to your child. The best accounts currently pay out around 3 per cent a year, and in 2017/18 you will be allowed to save £4128 in a junior ISA (the tax free amount goes up slightly every year).
As with a child’s saving account, the ISA will transfer to your child when they turn 18, at which point it automatically becomes a standard ISA. Another perk of an ISA is that, at 16 and 17, a child is also allowed to open their own standard or Help to Buy ISA – this is the only point in anyone’s life that they are allowed to hold more than one ISA at once, and effectively double the tax free allowance available.
Although you cannot open more than one ISA at a time normally, you can switch ISAs each year in order to find better rates. ISAs work best if the maximum tax free allowance can be saved each year, so their benefits can depend on personal circumstances. A drawback of Junior ISAs is that only parents and guardians can set them up and put money into them, they are not available to grandparents.
Junior Stocks & Shares ISA
As with standard ISAs, junior ISAs can be used to invest stocks and shares too. Returns are sheltered from Capital Gains and Income Tax, and they can result in considerably higher than interest on cash ISAs. However, as with any investment in stocks and shares, this is not set in stone and there are risks involved – you could end up losing money if the market dips.
The advice with any investment is always to play the long game. If you want to open a junior ISA to invest stocks and shares for your child, do it sooner rather than later. The longer you leave it, the more likely your investments will have ridden the troughs of the market and realised a healthy return by the time your child turns 18.
Fiducia Wealth Management is an established, multi award winning firm of independent financial advisers providing a first class services to private clients, business owners, family estates, charities, pension funds and trustees. To find out more about our services, please visit our website www.fiduciawealth.co.uk or contact us here.