Is There a Better Way to Save for Your Child’s Future?
Saving for your child’s future takes more than a little luck. Everyone wants to have a nice little nest egg for their children but having the spare funds to start a saving account for them can often be a little difficult. Getting their savings to a) happen, and b) prove worthwhile, takes some planning. The good news is, once you’ve got things set up, it’s then much easier to get on the right track.
Why Saving For Their Future Matters
We all want to make sure that our children are able to achieve their goals, whether this is with education, work or even heading off on a globetrotting adventure.
If they choose to continue in higher education, they will be more than likely starting their working lives with a mountain of debt. As the data shows, getting onto the housing ladder as a first-time buyer is a rather difficult. Then there’s the hard work of trying to get into employment, there are more people out of work than their are vacancies so it can be difficult to get a step in the door. Even when you do, it may not be in your chosen studied profession. On top of that they have to be realistic about salaries and benefits – no longer to profit from such things as final salary pension schemes.
For this generation, getting going in their adult life will require a leg-up from those who support them: their parents, caregivers, friends and family. The good news is, if you start early you can save a small amount regularly, and this will amount to a decent pot in the long term.
Why the Type of Savings Matter
However, not all methods of saving are created equally. It is so easy to nip into your local bank and open a current account for your child but when it comes to savings schemes you can be left flailing and wondering which is best. What is important to remember when you consider saving for your child’s future is…time. If you start when they’re young, time is on your side, and this is where it can pay dividends to look further than a high street bank account.
ISAs have a range of features that give your child the opportunity to achieve a better, reliable, return on their savings than other methods of saving. Forget the piggy bank, make sure you’re clear about the tax implications of saving in a bank account and look to where you can make the most returns.
Advantages of an ISA
ISAs have one marked advantage over savings accounts when it comes to saving for your child’s future and it’s all to do with tax allowances. It’s easy to think that if you’re saving for your child all of their savings should be tax-free: after all, they don’t earn anything, right? Well not quite. Typically, if you’re saving for your child, then if you save a hefty amount (and remember time might lead to a hefty amount even with small payments) when the savings produce a certain amount of interest or growth per year (currently over £1,000) they have to pay tax. Notably, particularly for higher-rate taxpayers, this is at their parent’s tax rate.
As a UK adult, your thoughts may turn instantly to a Cash ISA. You’ve been well-trained to think this is a good stash for your cash. And it has been…historically. However, low-interest rates mean that cash ISAs are now offering returns that many savers would turn their noses up at. The alternative is investing your child’s savings within an ISA. While this may sound intimidating, there are a couple of things to consider; one, stocks and shares ISAs have historically provided better returns than cash over the long term*; and two, because saving for your child is a long term commitment, your child’s money has more time to recover from any losses it experienced while invested.
What about a Junior ISA?
Junior ISAs offer the same great tax rules as the ISAs mentioned above, the main difference being that the money you save is exclusively your child’s. This means that they will have access to the money when they reach age 18, and will then have the decision to take the money or to leave it to mature into an adult ISA.
The main advantage of this is related to your own discipline; as parents we like to think that we wouldn’t dip into our child’s savings, but with a maximum term of 18 years there’s no telling what could materialise that may tempt you to do so if the money is saved within your own ISA. With a Junior ISA this isn’t an option – once you’ve put the money in, it’s there for your child and only your child. You can start saving into a Junior ISA for your child from just £10 a month, and you can save all the way up to the annual allowance of £4,080 in the 2016/17 tax year, an amount which will rise to £4,128 for the 2017/18 tax year.
So, if you want to start saving for your child’s future it’s worth thinking about these summarised points:
- Saving in a piggy bank will see inflation erode the actual value of your child’s savings
- Saving into a cash savings account at your bank will likely produce minimal growth, but in the event that you do earn decent returns then there is a chance that your child’s savings could be taxed
- Saving into your own ISA will give you control over your money, but will require extra discipline
- Saving into a Junior ISA hands some control over to your child when they come to take the money, but also means that there isn’t any temptation to erode their savings by dipping into them
- Finally, if you’re saving for the long-term (five years or more), then it may be worth thinking about a stocks and shares ISA or Junior ISA in order to aim for better returns.