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Give your little ones a head start

Hannah Duncan takes a look at the options available to help you save and invest for your children’s future.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

To give your child a helping hand with the rising costs of university, home ownership and even retirement, you should start saving sooner rather than later. When it comes to saving for the future, the earlier you start, the better. This is especially true with investing. You could spread the costs more easily and you could achieve better returns as your money has more time to grow.

For example, with a growth rate of 5% a year, if you started investing £100 a month when they’re born, your little one could have around £34,666 when they turn 18. Please take note this doesn't take account of charges of inflation - this could reduce the amount of goods and services money can buy in the future.

If you wait until they’re ten years old to start, you’d need to be putting aside almost three times as much – £295 a month - to expect the same amount at 18. Of course the amount you receive depends on the performance of the investments you choose. The value of all investments can fall as well as rise so you could get back less than you invest.

This article isn’t personal advice. When gifting money to a child it’s important to consider potential tax implications for the parent or person giving the gift. For example, when the gift falls outside of current inheritance tax exemptions. If you’re not sure about whether an investment is right for you, please speak to a financial adviser. Tax rules can change and the benefits depend on individual circumstances.

But what’s the best account to use?

Junior ISAs

A Junior ISA (JISA) is a clever and tax-efficient way to invest money for under-18s.

Once an account is set up, friends and family can easily add money online, by phone or by post. You can either choose the investments yourself or go for one of our ready-made portfolios, managed by experts. It’s a practical way to plan and create a nest-egg for your child. Remember once you add money to a JISA, it now belongs to the child and can’t be repaid back to you.

JISAs have generous tax benefits – there’s no UK tax to pay on any growth or income. That means your child can keep more of their returns. Their Junior Stocks and Shares ISA will automatically convert into an adult Stocks and Shares ISA from their 18th birthday. They can either choose to access the money from then, or continue to invest.

Once they have read all the important information, parents and legal guardians can open an account online with HL in less than ten minutes starting from just £25 a month or a one-off £100 payment.

5 April 2020 is the deadline to secure a Junior ISA allowance for this tax year. You can invest up to £4,368 towards your little one's future in this tax year. After this the annual allowance resets - from 6 April this year the allowance is more than doubling to £9,000.

Junior SIPP

A Junior SIPP – or Self-Invested Personal Pension paves the way for your little one to have a more secure and financially stable retirement.

You can invest up to £3,600 gross per child each tax year. The government will pay 20% tax relief (up to £720 into the pension) so this will only cost you £2,880. And like a Junior ISA, the investments inside a Junior SIPP are free of UK income and capital gains tax.

Under current rules, your child won’t be able to access money in a pension until 55 (rising to 57 in 2028). These rules are likely to change between now and your child’s retirement.

Junior Investment Accounts

A Junior Investment Account is a trust fund, known as a “bare trust”. Unlike Junior ISAs, which need to be opened by the child’s parents or legal guardian, a Junior Investment Account can be opened by grandparents, family or friends.

You can also put in as much as you like, without any limit. But there aren’t the same tax benefits you get with a Junior ISA or SIPP – growth and income are subject to tax. If income generated from a gift by a parent is more than £100 per year, then it’s taxable on the parent, not the child. You can also instruct money to be added to the bare trust in your will if you’d prefer.

Choosing a trustee is simple and straightforward, you can select yourself or someone else to make the decisions. The money can be taken out at any time by the trustee, but it must be used for the benefit of the child.

Setting up a brighter future for your child

Each option has different characteristics. You can select more than one option for your child, creating the right blend for you. You may want to open a Junior ISA to help them cover the cost of university, while setting up a Junior SIPP for further in the future. Creating the right balance for your child or children is straightforward and hassle-free.

To take advantage of your child’s annual tax allowance, remember to open or top-up your Junior ISA or Junior SIPP before 5 April.

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Hannah Duncan is an investment writer, and founder of Hannah Duncan Investment Content, with years of experience producing content for global leaders in finance and retail.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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