How to build a financial nest egg for your child
But, before doing so it’s important for parents to ask themselves the following:
- 1) Am I able to put money aside in the current climate?
- 2) Will saving alone build the nest egg I desire for my child?
- 3) Is investing an option worth considering to put my child’s nest egg to work?
How parents can save for a child’s future
There are lots of ways to save for a child, including a piggy bank, an easy access savings account, a pension, NS&I bonds or a Junior Individual Savings Account, otherwise known as a JISA.
JISAs can be a hugely effective way to save for a child’s future by allowing parents or those with parental responsibility to open them. But parents, grandparents and other family members can help put away a total of £9,000 between them each year tax free, with the child unable to access the money until they are 18 years old.
Like the adult equivalent, there are two types of JISA, and children can have one or both types of accounts:
- 1) A cash JISA – no tax on interest on the cash saved
- 2) A stocks & shares JISA – cash is invested and there is no tax to pay on any capital growth or dividends received.
The latest HMRC data shows that cash JISA’s continue to be more popular than stocks & shares JISAs, with 668,000 cash JISAs subscribed to between 2021 and 2022, compared with 275,000 Stocks & Shares JISAs.
One of the main reasons parents opt to keep money in cash, as opposed to investing it, is because of their low-risk appetite. However, in the current financial climate some could consider it riskier to leave money in cash accounts exposed to the eroding effects of inflation.
Investing little and often
Our research shows that parents (49%) are worried about rising costs and many are having to reconsider how much money they can put aside each month – both for themselves and their children. In fact, one in five parents (21%) say they have reduced monthly contributions to their child’s JISA since the beginning of last year.
Rising costs may be making it harder for parents to put money aside for their children. However, parents should take comfort in the fact that saving little and often can make a big difference over time. For instance, if you invested £25 a month in F&C Investment Trust at the point of your child’s birth 18 years ago, you would have £16,920 today, compared with £5,819 in a cash account.
It’s important to remember that the value of investments can go down as well as up and an investor may get back less than the amount invested. Information on past performance, as outlined above, is not necessarily a guide to future performance.
Make saving for children a family affair
While parents and guardians are the only people licensed to open a JISA on behalf of children, anyone can contribute to them. This means grandparents, aunts, uncles, godparents or even family friends can transfer money into a JISA, either on special occasions or via regular contributions with a direct debit. However, no parent, guardian, family member or friend can access these funds.
Our research shows that one in five grandparents (19%) are stepping in and regularly contributing to their grandchild’s JISA to support parents who cannot maintain payments.
Creating good habits
Building good money management from a young age can instil money habits for life. If you or another family member is contributing to a junior savings account it’s a good idea to discuss this with your child – even if they’re young.
Research from Cambridge University shows that a child’s approach to money is set by the age of seven. This means that by the time a child is in Year 2 at school they have already established money habits which could be difficult to reverse.
Research from Columbia Threadneedle Investments & F&C Investment Trust shows that the cost-of-living crisis has prompted four in ten parents (37%) to talk to children about money. In fact, a lot of parents want their children to learn from their past money mistakes so that they can develop good money habits that set them up for life.
Conversations about money don’t have to be difficult or boring. They can be made fun by helping a child envision a future purchase which can be worked towards by saving or investing. In some instances, this may even prompt a child to part with some of their pocket money for the sake of a bigger purchase down the line. Having these conversations regularly can instil good money habits from a young age and even help parents and guardians keep on top of financial goals.
While it’s important not to leave yourself in financial difficulty, especially in the current financial climate, now could be the perfect time to open a JISA or contribute to an existing junior savings account as tax year-end approaches. Contributions made little and often will add up over time and help build a nest egg for a child’s 18th birthday. It’s certainly something they will thank family for when the time comes!
Ross Duncton is head of EMEA marketing at Columbia Threadneedle Investments