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3 fundamental questions to answer if you’re investing for children
Building a nest egg for your child or grandchild could give them a head start when they reach adulthood. It might allow them to pursue further education, get on the property ladder, or even enjoy a gap year. While saving is one option you might want to consider, investing for children could yield higher returns.
Investing could help the nest egg grow at a faster pace
When you’re putting money aside for a child, a savings account or even a piggy bank might come to mind first. Holding assets in cash can feel “safer” as it’s often easily accessible and it won’t be exposed to investment risk.
However, unless the savings earn interest at a higher rate than inflation, the value of the nest egg could fall in real terms.
Let’s say you added £20,000 to a savings account for your child in 2018. According to the Bank of England, over the next five years, inflation averaged 4.5% a year. So, if the savings didn’t earn almost £5,000 in interest during that period, the spending power has fallen.
Investing a nest egg does mean taking some risk. Yet, it could provide an opportunity for the earmarked money to grow at a faster pace than inflation.
If you want to invest for a child to give them a financial boost when they reach adulthood, here are three important questions to consider.
- Is investing appropriate for your goals?
While investing has the potential to grow the nest egg at a faster pace, that doesn’t mean it’s automatically the right option.
In some circumstances, saving might be better suited to your goals. For instance, if your child is a teenager and plans to use the nest egg to pay for university, the shorter time frame could mean investing isn’t appropriate as you’re at greater risk of being affected by market volatility.
There’s no one-size-fits-all solution if you decide to invest either. So, considering how much risk you’re comfortable with and whether it suits your circumstances could help you make decisions that are right for you.
- How should you invest to create a nest egg?
There’s more than one way to invest on behalf of a child. Here are some key options you might want to consider.
- Junior ISA
Like their adult counterparts, a Junior ISA (JISA) is a tax-efficient way to save or invest. If you hold investments in a JISA, the returns will not be liable for Capital Gains Tax (CGT). According to government statistics, of the 1.2 million JISAs that were subscribed to in 2021/22, 58% were investment accounts.
In the 2024/25 tax year, you can add up to £9,000 to a JISA.
However, you should keep in mind that the money cannot be accessed until the child turns 18. Once they reach adulthood, the JISA will convert into an adult ISA, and they’ll be able to use the nest egg how they wish. Discussing how you’d like them to use the money as they’re growing up could help them make wiser decisions.
- Trust
If you’d like to have more control over when and how the investments are used, placing them in a trust might be useful.
You can set out how the trust is to be run and the conditions of when it can be accessed. For example, you may state your child can take control of the assets when they’re 25, but they may also use a portion of the money before then to cover education expenses.
There are several different types of trust to choose from. Working with a solicitor may help you decide which option is right for you and reduce the chance of mistakes occurring when you’re setting up a trust.
- Pension
They might not have entered the world of work yet, but it’s not too soon to start thinking about your child’s long-term financial security.
In fact, due to the long investment time frame providing ample time for returns to compound, using a pension to invest could create a sizeable nest egg.
Those who don’t have an income, including children, can tax-efficiently add up to £2,880 to a pension in 2024/25. Contributions benefit from tax relief, so if you contributed the maximum amount, a total of £3,600 would be added to the pension.
According to calculations from interactive investor, if you contributed £2,880 to your child’s pension when they’re born, they’d have a nest egg of almost £72,000 60 years later, assuming average returns of 5% a year net of fees, without having to make any additional deposits.
Of course, your child wouldn’t be able to access the nest egg until they reach pension age. The pension age is currently 55, rising to 57 in 2028, and it’s likely to increase further during your child’s lifetime. The tax treatment of pensions is also subject to change.
- Could the investment returns be liable for tax?
While it might seem strange to consider tax liability if you’re investing for a child, it could be an important factor.
Just like an adult, a child will have to pay Income Tax if their total income exceeds the Personal Allowance, which is £12,570 in 2024/25. In addition, if they earn more than £100 in interest in a single tax year from the money you have given them, you could become liable for tax on the interest earned too.
So, while it’s rare that children will pay Income Tax, it’s not impossible. As a result, you might consider using tax-efficient ways to invest, such as through a JISA or a pension.
Contact us to make your children or grandchildren part of your financial plan
Making your children or grandchildren part of your financial plan could help you reach your goal if you want to lend a helping hand. Whether you want to offer regular support or a one-off gift, a financial plan may help you identify the effect it might have on your finances, how to gift tax-efficiently and highlight other factors you may need to consider.
Please contact us to talk about how you could use your assets to help your loved ones.
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Please note: This blog is for general information only and does not constitute advice. We recommend you speak to your financial adviser before making any decisions. The information is aimed at retail clients only. No statements or representations made in the article are legally binding upon Skerritt Consultants Limited or the recipient. All references to taxation are in relation to UK taxation and are based on our current understanding of UK laws and HMRC practices. Tax reliefs may change in the future and may not be maintained. Tax treatment is based on your individual circumstances. All other information is based on our understanding of current legislation and regulation which may be subject to change. The value of your investments (and any income from them) 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. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
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