Investing for children
Investing for children can be a scary experience. When should parents start? How much should parents save? Can parents control when the child accesses the money and importantly what they spend it on? Depending on the investment vehicle chosen, some of these questions answer themselves but there are choices and each should be considered.
Investing for children with Junior ISAs
One option often taken by parents when saving and investing for children is a Junior ISA (and their predecessor the Child Trust Fund). Under Junior ISA rules, when a child reaches age 18, the Junior ISA becomes an adult ISA, and the child gains control over how the money is spent.
We estimate that parents investing the maximum contribution each year into a stocks and shares Junior ISA for 18 years could save around £330,000 (assuming the allowance increases 2% a year and investments grow by 4% net of charges). That’s a lot of money to give an 18-year-old!
A Junior ISA is a simple choice but probably (for most anyway) the contribution is likely to be much smaller than the £9,000 annual allowance. The Junior ISA offers tax efficient growth and has the benefit of ‘rolling’ into an ISA. The child can then access tax free capital as and when they choose after 18 and could retain some or all of the investment in a tax wrapper for years to come. In common with the adult stocks and shares ISA the value of the investment can fall as well as rise and investors may not get back the amount invested.
60% will be accessed at 181
Every child is different and a parent’s attitude towards their child receiving a lump sum of money on their 18th birthday ranges significantly. With the first Child Trust Funds (starting in 2002) beginning to mature, the worry for parents is fast approaching – when will the money be spent and what their children will spend it on.
60% of parents believe their children will access their Child Trust Fund at 18, and 85% said they think their children will have accessed it by 211. Spending the money on a car tops the list followed by education costs and entertainment in 3rd place1.
With so many children accessing their savings at 18 what are the alternatives and how tax efficient can they be?
Using an adult ISA limit provides control
Parents can retain more control by investing for children into their own ISA either exclusively or after they have contributed an amount to the Junior ISA that they are comfortable with. Contributions made into an ISA in the parent’s name can still be used to fund the child’s future, but the parent would retain control over when and how the money is spent.
The downside of this approach is that the savings for the child uses the parent’s own tax-sheltered allowance. Depending on wealth, the current £20,000 ISA limit may provide sufficient room for both personal savings and that earmarked for the child but for parents who already maximise their own ISA allowance another alternative solution might be required.
Mix it up!
The likely answer to this problem is a mixture of all of these investment vehicles, particularly for wealthier families looking to provide a more significant savings pot. A Junior ISA is usually the first point of call but with a limit to the savings and immediate access at 18 this might only be the first part of the solution. This could then be supplemented by using personal ISA allowances where available. This would provide a well-rounded long-term savings plan providing some access at 18 with the rest following when considered appropriate by the parent.
1 Quilter survey August 2020 – 713 respondents