Where to put savings for your children…
Parenthood is amazing but it also comes with decisions. One of those might be what to do with the money you’re putting aside for your children. I hope this helps to make it easier.
Clarify Your Savings Goals
First of all, you need to think about what the savings are for. Do you want the money to pay for school or University fees? What about a deposit for a house? Maybe a wedding? It’s even possible to start putting away into a pension so they get a head start on retirement planning.
Risk Level
The level of risk you should take with your money depends on your attitude towards risk and on your timeframe for saving.
If you’re saving but planning to spend it within five years you should probably avoid taking any chances on an investment. Imagine you’re planning on taking them to Disneyland in two years. You might think investing it means it will grow faster but then you can’t go because the value of the investment drops. It’s riskier to invest for a shorter period of say 5 years or less. But all is not lost, interest rates for cash saving are higher than they have been so it’s worthwhile shopping around to see what kind of interest rate offers you can get.
If you’re planning to save for your child’s retirement it will not be accessed for a long time. The interest rate you’ll get from cash savings is unlikely to match inflation. So your hard-earned £100 per month placed in a savings account now might only buy them a Mars bar each month when they retire.
The only way to aim for growth that is higher than inflation changes is to invest it. For most people, investing in low to medium-risk products might mean you miss out on the potential of more growth but if you are the sort of person who might struggle with the fluctuation from a higher-risk investment it may be a better option.
I could write pages on risk alone, but the main point I want you to take from this is that when I say ‘something higher-risk’ I mean that it should be a well-diversified portfolio i.e. your money spread over a few different areas. If you don’t know what I mean by that you can do a bit of research but if you’re still struggling with specifically where to invest my contact details are below.
Let’s imagine there’s something in between the two. You need to consider how long you’re investing, the longer you’re investing, the higher risk you could consider because you have time to ride out the ups and downs before you spend it. As you get closer to when you need it you can lower the risk level just in case there are any big drops in the value. The other thing to think about is your sanity (we call it attitude to risk), how would you feel if you lost or gained? And how much you can cope with seeing values go up and down. Lower-risk investments will still go up and down but are designed to go up and down less dramatically.
Cash
If you’ve decided that an investment isn’t a good choice have a look at what savings accounts are available. Unless you’re putting away big amounts and/or you’re a high earner you probably won’t need to worry about paying tax on what you earn in interest. But if you were concerned about paying taxes and you wanted an account in your child’s name, you could look at Junior ISAs that are held in cash.
Tax Wrappers
A tax wrapper is a fancy way of being more tax-efficient. You could invest without a tax wrapper but you could be taxed more on your profits or earnings.
Junior ISAs
Now seems like a good time to tell you about Junior ISAs… they allow parents to save up to £9,000* each tax year for their child and any gains such as profit from buying and selling an investment or interest are free from capital gains tax or income tax. You put the money in, invest it (or keep it in cash) and is very tax-efficient.
The legal parents or guardians of the child have to be the ones to open a Junior ISA, but anyone can pay in once they are up and running.
*This is for the tax year 2023-24
Here’s what I don’t love about them. Kids have control of their ISAs from age 18, they can spend it or they can make investment decisions. For some, it is a little early to make sound financial decisions about larger amounts of money. Not all kids are like that, and you might have some influence over them to help them with those sorts of decisions. That’s not awful. However, they can have access to their ISA from age 18. I’ve joked with a lot of parents about what we were doing in our late teens/ early 20s and that they didn’t want the savings to be used on short-lived treats (like we did, oops). Your children might be more responsible than I was, but there is an alternative…
Adult ISAs
Just because you’re saving for your children it doesn’t mean that you can’t keep it in your name. If you haven’t used your ISA allowance for yourself, you could consider continuing to explore that. You’ve got £20,000* each tax year that you can put into an ISA for yourself. That’s for each parent too. That way you can give your children the savings when you think they’re ready.
Here are a couple of considerations if you are thinking of keeping savings in your name.
If you think you might have an inheritance tax problem, do some research on personal allowances. Gifting money to your children is a way to get money out of your estate and pass it down to your kids. If you were to get divorced, your spouse might get half of your assets, including these savings.
*This is for the tax year 2023-24
Pension Contributions
You can contribute £3,600 to a pension each year for your children. There’s tax relief available so you’d only need to put in £2,880 to achieve this. If you have a company, unfortunately, you can’t make payments from it, you will have to pay them personally. As with Junior Isa’s, it’s only the parent or legal guardian that can open a pension but anyone can contribute to it.
Trusts
Trusts offer flexibility and control over how assets are distributed. There are a lot of options available. I’d suggest working through your other options before jumping into the world of trusts simply because they can be complicated.
What to invest in?
The next question is what in? Examples include equities and bonds (aka stocks and shares). If I covered this, I’d write something more like a novel than a blog. So I’ll say this, there are a lot of options available and don’t forget to reach out to a professional if you’re not certain about your choices.
It’s also crucial to review your choices. There can be changes to tax-wrappers available and allowances can change yearly. Interest rates can change and investments need to be managed to make sure they stay consistent with what you want the savings for.
Jamie Lowe
07469 712299
www.calendly.com/jamie-lowe-tsw
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 invested. An investment in equities does not provide the security of capital associated with a deposit account with a bank or building society or cash ISA.
The levels and bases of taxation, and reliefs from taxations, can change at any time and are generally dependent on individual circumstances.
Trusts are not regulated by the Financial Conduct Authority.
Cash ISAs are not available through St. James’s Place.
True Self Wealth Ltd is an Appointed Representative of and represents only St. James's Place Wealth Management plc (which is authorised and regulated by the Financial Conduct Authority) for the purpose of advising solely on the group's wealth management products and services, more details of which are set out on the group's website http://www.sjp.co.uk/products.
SJP Approved 19/02/2024
