Saving for Children: How to build a strong financial foundation for your child

Jonathan Bibby
Financial Adviser Team

Investing is something that is typically associated with adults, but it can also be extremely beneficial to introduce children to investing at a young age. This allows them to begin to build both their financial knowledge and an investment portfolio, setting them on their way to a financially stable future.

One of the main reasons children should get involved in investing early is to help build their wealth through compounding, which allowing their investments to grow over a longer period of time, potentially leading to a significant accumulation of wealth by the time they reach adulthood. So when it comes to investing for your child or grandchild, the earlier this is the done the better. Investing can also introduce children to important financial concepts, and educates them in money management. By learning about investing, children develop a deeper understanding of savings, compound interest, risk, and long-term financial planning. With that in mind, let’s take a look at the tools available to begin the process of building your child’s wealth?

Junior ISA’s

Since their inception in 2011, the predominant way to save money for children has been through the use of a Junior Individual Savings Account (JISA) and there is good reason for this. There are two types of JISA: a Junior Cash ISA, and a Junior Stocks and Shares ISA. Contributions to the JISA’s can be made by anyone - parents, grandparents, aunts and uncles, friends, or godparents. Similar to a regular Individual Savings Account, investments will not be subject to tax. However, JISA’s differ in that their allowance for yearly contributions is set at £9,000 as opposed to the £20,000 with regular adult ISA’s. Once the child reaches 18 years of age, the money held in the JISA can be transferred into an adult ISA.

Pension Funds

While starting a pension plan for a child before they have reached adulthood or started working seems like an odd thing to do, investing small and starting early can have a huge impact in the long run. It is possible to set up pensions for children, from birth, with a maximum annual investment allowance of £3,600 which can take advantage of tax reliefs set up by the government. In a similar way to JISA’s, anyone can contribute to the child’s pension, which can allow grandparents for example, to mitigate the effects of inheritance tax.

Trusts

A trust is a structure where assets are held by a group of individuals on behalf of another person. Children are usually not allowed to hold investments in their own name, and while there are some investments that are designed for children (such as the previously mentioned JISA’s), they are typically limited in size and offer a narrower selection of investments choices. Trusts therefore allow greater flexibility, a wider range of fund choices, greater protection, potential tax efficiencies in certain circumstances, and can be unlimited in size. There are different types of trust that can set up for children, including bare trusts and discretionary trusts. Working out which one is most suitable for your situation would be best done with the help of an independent financial adviser.

If you would like to speak to us about the options that are available to you and start your children on their investment journey, we would be happy to do so. You can either speak to your adviser directly or contact us by telephone or via our website.

This article isn’t personal advice. If you’re not sure whether a course of action is right for you, ask for financial advice. The value of investments and the income derived from them may go down as well as up.