Three ways to invest for a child
Young people are growing up in a world full of new opportunities. However, they also face a future filled with uncertainty and financial challenges. Many start their working lives with debts from university, putting a serious strain on their finances.
Starting to save early for a child or grandchild’s future can give them a much-needed financial leg-up.
Brewin Dolphin looks at three of the options available::
Junior ISAs (JISAs) are a great way to put money aside for a child, offering the same tax advantages as an adult ISA – all earnings are tax-free.
Money in a JISA is locked away until the child reaches 18, at which point they will receive access to their lump sum that they can either convert into an ISA or put to good use for university, a deposit on a first home or for such things as buying a first car.
Only parents or guardians with parental responsibility can open a JISA on a child’s behalf, but anyone can contribute up to the annual JISA allowance during a single tax year, currently £4,368 for the 2019-20 tax year.
The annual allowance can be invested in cash, stocks and shares or split between the two.
Seven out of ten JISAs are invested in cash, but a stocks and shares JISA offers potentially higher returns but, unlike the cash ISA, carries the risk of capital loss.
Stocks and shares JISAs are attractive if you are investing when the child is a baby or toddler because over the long-term share investments nearly always outperform cash savings and the power of compound growth can make a big difference, especially in the later years closer to 18.
Bare trusts are a convenient and tax-efficient way for individuals to invest money for a child’s future that are often overlooked and can be opened by anyone. Under a bare trust, money or investments are held by a trustee for the benefit of a beneficiary, such as a grandchild.
By placing the assets within a bare trust, the trustee relinquishes ownership of them, but they control access to the money or investments until the beneficiary reaches 18 (16 in Scotland).
The tax treatment depends on who the money is put into the trust by. If it’s by anyone other than the parents, they are taxed as if they belong to the child. This usually means that there is little or no tax to pay on any income or gains.
If money or investments are put into a bare trust by a parent and the parental gift exceeds £100 per year, the parent will have to pay tax on all the trust’s income until the child reaches 18.
The idea of starting a pension for a child might sound ridiculous, but it can be a sensible idea, as it can give a huge boost to their retirement savings. At present the money can’t be accessed until age 55, or 57 from 2028.
The maximum you can put into a junior SIPP is £2,880 per year.
Contributions benefit from 20 per cent tax relief boosting that £2,880 to £3,600. It is possible to invest in a wide range of shares and investment funds within a junior SIPP, however the biggest concern may be that the pension pot is growing too big: a nice problem to have.
If you do set up a child with a pension they will need to keep an eye on the lifetime allowance. The current lifetime allowance is £1,055,000 for the 2019-20 tax year.