When it comes to planning for your child’s financial future, a Junior ISA is often thought about as it’s a great way to save or invest up to £9,000 a year for them, tax-free (although the amount you can put in may change in future).
But when should you do it? Is there a magic age that’s best to start putting money away, or is there a tipping point when it’s too late? We’ll cover everything you need to know in this article.
When to start saving for your child?
The sooner the better is a general rule of thumb when it comes to saving for your children. Though unfortunately, this isn’t always possible for everyone – there may be more pressing financial matters, or you’re simply not in a position to put money away for the long term.
But if you are in the position to start saving, then it could be worth putting money away for your child before they’re even born. Babies are expensive and there’s lots that you’ll need to buy in anticipation for them – from pushchairs, to cribs, to safety catches for draws and doors. All of this can add up, but if you financially prepare for it beforehand then it shouldn’t come as such a surprise.
Once they’re born you could open them their very own Junior ISA and start building up savings for their future.
If you’re considering a Junior ISA, then it’s worth noting that once the money is paid in it belongs to your child and it’ll stay there until they turn 18. That means you can’t use it as a way to save for their birthday presents or school uniform, or any other immediate treats or needs. this is more for helping them with their first home, buying a car, or travelling the world.
Saving in cash or investments?
How you choose to save for your child is entirely up to you, but two of the most popular options are cash or investments. There’s no wrong answer here, as both options have their own benefits and it will likely come down to what’s right for your needs.
For example, parents may choose to save in cash (through a Junior Cash ISA) as this is what they know best. You’re also unlikely to lose money when saving in this way, unless you’re banking with someone who’s not covered by the Financial Services Compensation Scheme and something goes wrong.
However, make sure you keep an eye on interest rates and inflation.
Put simply, inflation is why things get more expensive over time and if the interest you receive isn’t as much as inflation, then your child’s money won’t be able to buy the same amount as it used to.
Investing (through a Junior Stocks and Shares ISA) requires you to take a bit of risk, and many people worry they don’t understand it enough to start doing it.
However, with robo-investing, you don’t need to understand the ins and outs to be able to benefit from investing, as a team of experts will take care of everything for you. And while you do run the risk of getting out less money than you put in (as market performance fluctuates), there’s also the potential for much greater growth than you might get from a cash account.
Plus, if you start saving for your child early, they’ll be able to benefit from long-term investing, which means they could wait out market bumps that happen before they’re 18.
Why start earlier?
There are a couple of perks to saving for your child’s future when they’re young. The first, and most obvious one, is that you can put in less to build up a decent pot – if you have 18 years to save, then 100 a month could go twice as far as if you only have 9 years to save.
Let’s talk numbers for a second. Say you wanted to invest, so you opened a Junior Stocks and Shares ISA when your child was born and started putting £100 away for them each month. By the time your child is 18, they could have just over £30,000 in their account (£30,696 to be exact). However, if you chose to put off saving until your child was 10, the same contributions would only provide them with £11,464.
There are two reasons for this. The first is that you’d only contribute half the amount which will have a significant impact on total value. But the second factor is compounding. This is where you reinvest any profits that you make, meaning that they’re then able to make their own profits. Over time, these can really add up and your child’s account could grow much quicker.
When is it too late to save for your child?
It’s never too late to start saving for your child. However how you choose to do this may change based on their age.
For example, if your child is older than 18 then you won’t be able to open a Junior ISA for them. But just because they’re technically an adult doesn’t mean you can’t still save for your child! There’s still plenty of time to save and help pay for big life-events like a wedding or first home, using your own account. This could also be a good option if you don’t think your child is responsible enough to be given a large sum on their 18th birthday.
If your child is still under 18, but isn’t a little kid anymore, then you could, if you can afford it try to save larger amounts more regularly. But this doesn’t have to be huge amounts either.
For example, if you could save £200 a month from the time your child turns 16 then you could have £5,079 when their Junior Stocks and Shares ISA matures 2 years later. While this may go against the general idea that investing is for the long term, your child could choose to keep their money invested and be able to take advantage of the potential benefits of long term investing.
Regardless of how or when you chose to save for their future, it could be worth talking to your child about good money management to prepare them for the working world.
1: This is the projected value for a Confident Plan (Medium Risk Plan) with an Original theme. This is only a forecast and is not a reliable indicator of future performance. If markets perform worse, your return could be £23,528. If markets perform better, your return could be £40,503. Values correct as of 15/02/2024.
2: This is the projected value for a Confident Plan (Medium Risk Plan) with an Original theme. This is only a forecast and is not a reliable indicator of future performance. If markets perform worse, your return could be £9,726. If markets perform better, your return could be £13,373. Values correct as of 15/02/2024.
3: This is the projected value for a Confident Plan (Medium Risk Plan) with an Original theme. This is only a forecast and is not a reliable indicator of future performance. If markets perform worse, your return could be £4,695. If markets perform better, your return could be £5,425. Values correct as of 15/02/2024.
With investing your capital is at risk, so the value of your investments can go down as well as up, which means you could get back less than you initially invested.
The tax treatment of your investment will depend on your individual circumstances and may change in the future.
Wealthify does not offer advice, if you’re not sure whether investing is right for you, then please speak to a financial adviser.