September has arrived and the nights have begun to draw in. Children are returning to school and students are heading back to university.
As a parent or grandparent, you’ll have given thought to your child’s financial future. You might be putting money aside for them – for university fees, the deposit on a first house, or even for their retirement.
Starting early gives your child the best chance of a financially stable future.
In fact, start early enough and it might be possible – though not cheap! – to make your child a millionaire. Maybe even before they reach the age of 40.
Here’s how.
(And remember, the figures below are for illustration purposes. Put aside whatever you can afford and start saving as early as possible.)
1. Set up a Junior ISA on their behalf
A Junior ISA (JISA) is a fantastic way to start saving for your child.
Any child born after January 2011 is eligible for a JISA. They can withdraw funds from the age of 18, or transfer it to an adult ISA.
In April 2020, the JISA Allowance – the limit on annual contributions into a JISA – rose significantly. For the 2020/21 tax year, you can now contribute up to £9,000 a year into your child’s JISA, or £750 a month.
Although only a parent or legal guardian can set up a JISA, grandparents, relatives, and family friends can all make payments into one on a child’s behalf.
Like an adult ISA, JISAs are tax-efficient. Interest from a Cash JISA is tax-free and any gains your child makes on investments in a Stocks and Shares JISA are free of both Income Tax and Capital Gains Tax (CGT).
Figures from Hargreaves Lansdown confirm that using the full JISA allowance of £9,000 from birth, up until their 18th birthday, could earn your child £228,919. This is based on a growth rate of 5% and an allowance of £9,000 for the duration of the JISA. The calculations factor in a 1.25% annual charge, but not inflation.
A JISA could be perfect for helping towards the cost of university. But where should your child spend their money, and would they be better off keeping it invested?
Using a JISA to help towards the cost of accommodation, food, or books could help relieve the financial stress of university life. It might be tempting to use the money to help pay tuition fees too, but this could be a mistake.
Student Loan Company interest rates are low. Those starting university on 1st September 2020 only begin making repayments when they earn more than £26,575.
Even if your child is expecting to leave university as a high earner, paying off higher-interest debt or using the money to increase the deposit on a first home might be more beneficial in the long term.
2. Make full use of gifting allowances to boost investment (possibly for a first home)
HMRC allows individuals to gift money tax-free. An individual can receive gifts of up to £3,000 a year with no tax to pay.
You might not have family and friends able, or willing, to gift a combined total of £3,000. But making use of tax-efficient savings and allowances is a great way to boost your child’s savings.
If your child received £3,000 a year and invested it into their ISA (having converted their JISA to an adult ISA at age 18), their ISA could be worth £566,556 by the time they reach age 38. These Hargreaves Lansdown figures are an example only but illustrate the size of savings that your child could amass. They factor in a 1.25% annual charge, but not inflation.
Remember too that the adult ISA allowance is £20,000. That’s another £17,000 that your child could pay into their ISA each year without oversubscribing.
Your child might move some of the money into a Lifetime ISA.
Available to those between 18 and 39 and with a subscription limit of £4,000 a year, LISA investments receive an additional 25% top-up from the government. That could amount to £1,000 a year.
The fund has to be used to buy a first house or left invested until after your child’s 60th birthday.
A LISA is a great way to help your child onto the property ladder. Be aware though, there is a 25% penalty applied to all withdrawals before age 60 that your child doesn’t use toward a first home.
3. Start a pension
Starting a pension for a child as soon as they are born is a great way to accumulate wealth on their behalf. They won’t be able to access their cash until they reach retirement age, but a long-term investment has the potential for significant gains.
The minimum retirement age for the 2020/21 tax year is 55. This will rise to 57 in 2028.
You can pay up to £3,600 into a pension on behalf of a child or grandchild and pensions are incredibly tax-efficient.
You’ll receive tax relief at the point the contribution is made, based on the rate of Income Tax you pay. If you’re a basic rate taxpayer, your £3,600 contribution will only cost you £2,800.
Hargreaves Lansdown illustrations suggest that contributing the maximum of £3,600 into a Junior SIPP from birth would give your child a pension pot of £420,310 at age 60. This is based on 5% growth and an annual charge of 1.25%.
Remember that the Annual Allowance – the amount your child can contribute to their pension and still benefit from tax relief – is based on earnings but capped at £40,000.
This means your child’s pension contributions could rise substantially once they start working.
Get in touch
By making full use of JISA allowances, HMRC gifting rules, and pension allowances, your child’s accumulated wealth could exceed £1 million by the time they reach age 40.
But whatever you can afford to put away, the sooner you start the better. Please email hello@fingerprintfp.co.uk or call 03452 100 100 to discuss any aspect of creating a nest egg for your child.
Please note
A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.
Investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
