Securing your child’s future is one of the most important things you can do as a parent. But where do you start? Here’s a few things you could do to build a nest egg for your child.
The first thing you could do is to try and anticipate their future needs (and wants), whether it’s buying a house, organising a wedding, or going to uni. For each life goal, you could set saving targets and draw up a detailed plan of action – how much will you put aside to help them reach their goals? And will you be saving or investing or doing something else? To make the planning even more efficient, it could pay off to ask your child about their aspirations – if they don’t want to go to uni, then you can adjust your strategy and put more money towards their other dreams.
Think about saving
If you want to secure your child’s future, it’s important to put some money aside. A recent study shows that, on average, parents in the UK, are saving £42.45 a month for each child1. Obviously, if you can’t afford to put that much aside, that’s absolutely fine – any amount will do. Saving isn’t just about how much you can tuck away, it’s also about how long you can do it for – and if you want to build a good nest egg for your child, patience and consistency are key. Putting £15 a month in a savings account may not seem like a lot, but after five years, your child’s savings pot would be worth £900 – and that’s without interest payments!
Consider opening a Junior ISA
Opening a savings account for your child can be a great way to boost their finances, but it’s not the only thing you can do to secure their future. If you live in the UK, you’re allowed to put money in a Junior ISA. What is it, you ask? Well, put simply, a Junior ISA (JISA) is a type of account that lets you save or invest tax-efficiently for your kid – this means you can put money aside for your child and they won’t pay tax on any returns they make.
How many Junior ISAs can you open?
There are two types of Junior ISA:
- A Junior Cash ISA – it’s essentially a savings account but your child will not pay tax on any interest they earn.
- A Junior Stocks and Shares ISA – your kid’s money will be invested and they won’t pay any income or capital gains tax on their profits.
You can either open a Junior Cash ISA, a Junior Stocks and Shares ISA, or both – the choice is completely up to you. Before you make any decisions, it could be wise to weigh the pros and cons of both saving and investing.
Whilst your child is guaranteed to make a return with a Junior Cash ISA, it’s a good idea to consider the impact of inflation (increase in prices) and low interest rates on their money. If the interest rate they get from the bank falls below the rate of inflation, then the real value of their savings could go down over time – this doesn’t mean they will lose money, it means that in a number of years, their savings, when used, won’t get them as much as it used to.
With investing, returns aren’t guaranteed, and your child could lose money. However, since your child’s profits aren’t tied to any fixed interest rate, there’s also a chance for inflation-beating returns. In fact, history suggest that investments tend to perform well over the long-term. Between 1983 and 2020, the average inflation rate (RPI) in the UK was 3.4%2 and for the same period, the FTSE 100, the UK main stock market, returned about 6.2%3 a year (with re-invested dividends) – which sits well above inflation – please note that although historical performances provide useful insights, past performance is not a reliable indicator of future results.
How do Junior ISAs work?
Junior ISAs come with many rules and it’s worth learning about them before getting started, for example, how much you can put in. As things currently stand, you can save or invest up to £9,000 a year (subject to change) – this is your child’s ISA allowance and every year, you’ve got until midnight on the 5th April to use it, or it’ll be lost forever. Everything you put in a Junior ISA is locked away until your child’s 18th birthday. So, whilst family and friends can also make contributions, nobody will be able to dip into their pot. And once they turn 18, your child will gain full control of their account, which will automatically become an Adult ISA. They will therefore be in charge and able to decide what to do with their money.
How to open a Junior ISA
If you want to open a Junior ISA, you’ll need to find a provider that suits your needs, and this requires a bit of research – make sure you shop around before you make any decisions. If you’re looking to invest in a Junior Stocks and Shares ISA, you may want to check out digital investment platforms. With Wealthify, the hard work is done for you, meaning you don’t need much knowledge to take the plunge. Our team of experts will build and manage your child’s ISA on an ongoing basis. All you need to do is select a risk level that suits you and choose how much you want to put in – with our platform, you can start with just £1!
Write a will
Death is definitely not something we want to think about, but it’s always wise to try and plan for when you’re gone. If you want your child to inherit some of your assets (e.g. property, savings, and investments), you’ll need to write down your wishes in a will, that way your child will receive whatever you want them to get after your death. One important thing to note is that your assets may be liable for tax, so you may want to check the current rules about inheritance tax before writing your will. If your assets are worth £325,000 or less, then there won’t be any inheritance tax to pay – this is your Nil Rate Band (NRB) or inheritance tax threshold. Also, you can pass your home for to your child if the residence is worth no more than £500,000 (or £1 million if it’s passed from you and your partner). If you’re finding all the inheritance rules a bit confusing, don’t hesitate to talk to a financial adviser – they’ll be able to help.
Teach your child about money
Giving your child money is great, but teaching them about saving and investing is even better. You won’t always be around to help your child, and as they grow, they’ll need to make their own financial decisions. If you want your kid to understand the importance of saving and delayed gratification, you’ll need to show them how it works – and the earlier you start, the better. If your kid is still young, you could give them some pocket money every month and ask them to save for something that they really want. You could also show them your savings and/or investments and explain why and how you’re doing it. And if your child has a Junior ISA, why not show them how it’s working?
1: L&G Investments
2: Data from ONS
3: Data from Bloomberg
Past performance is not a reliable indicator of future results.
The tax treatment depends on your individual circumstances and may be subject to change in the future.
Please remember the value of your investments can go down as well as up, and you could get back less than invested.