Are you a parent who wants to put something aside for your child’s future?
If your child has just been born, then you have the big advantage of having time on your side which is a huge asset when investing money.
Notice I said investing there rather than saving. They are very different options, especially now even more so in today’s low-interest world.
Interest rates in the UK have been at historically low rates for a decade now, and with no sign of the uncertainty of Brexit abating, they don’t look like moving upwards any time soon, despite the claims of George Carney of The Bank of England.
Anyway back to your child’s money.
To make things easier for parents, there is a government-approved savings/investment vehicle called a Junior ISA. It’s also tax-free, which means the government will not deduct tax from any gains made on your child’s money.
You don’t have to open a Junior ISA, you could use a standard child savings account with any bank.
However junior ISAs have been designed and built specifically with a child’s savings in mind.
For a start, the money invested is the sole property of the child. It can be managed by the child from the age of 16, however, the money can only be accessed when the child turns 18.
It’s possible for other family members to contribute to the fund also.
There are two types of Junior ISA available. Just like it’s big brother, the Junior ISA can also be purchased in cash and stocks and shares versions. However, in these days of super-low interest rates, a Stocks and Shares JISA could have the potential to vastly outperform it’s cash counterpart. Bear in mind though that investment values can fall as well as rise and the performance of the JISA will be dependent on the funds and provider which a parent decides to use.
The recent Woodford Scandal has given a bad name to investments and investment platforms, however, straight forward tracker funds are widely available. These funds can track for example the FTSE 100 and generally speaking, are usually much cheaper than their actively managed counterparts. They also offer a level of transparency with indices such as the FTSE 100 and 250 performance being widely reported in the national news on a daily basis.
When choosing a Junior ISA, keep an eye out for the fund charges which can have a big effect on a long term investment plan such as this. Use this Junior ISA calculator to see how charges work.
Best for: Parents willing to stick it out for the long term.
Using Your Own ISA Allowance
There’s nothing to stop you using your own ISA allowance of course.
With the current maximum ISA allowance sitting at £20,000 per annum, there should be plenty of room in most Briton’s accounts for stashing money for a child.
How does this differ from a Junior ISA? Well, the money would not legally be the property of the child and the fund, in most cases, could be accessed at any time if needed.
This may be suitable for a grandparent for example, who wishes to invest some money themselves for a grandchild whilst keeping their gift separate from a Junior ISA. (A Junior ISA can only be opened by a child’s parent or guardian). They can gift the money to the child whenever they want and don’t need to wait until the child turns 18 to turn the cash over.
Best for: Grandparents or other family members wishing to build their own investment pot for a gift for a child.
Child savings accounts
Most high street banks offer some form of kiddy savings accounts. Some coming with freebies such as piggy banks or other similarly low key offers. These are usually cash accounts offering low-interest rates. As such they don’t have the long term growth potential of a JISA or ISA, however, that’s not too say they can’t have their place if saving for short term goals for a child.
Best for: Short term saving goals e.g. holiday money.
Child Trust Funds
Child Trust Funds (CTF) were introduced by the previous Labour government over ten years ago. Savers were initially incentivised to stash their cash with a £250 gift which went straight into their fund. They were also promised another £250 on the child’s seventh birthday if they continued to save. However many savers (myself included) never seen the subsequent seventh birthday payment as these incentives were withdrawn by the coalition government in the wake of the financial crisis of 2008.
It has been said that many CTFs are now ‘zombie’ accounts, which infers that the rates are not competitive due to there being no incentive for the providers to maintain their services on a product which they can’t sell.
If your child has a CTF, you can easily transfer it into a Junior ISA for free with most providers.
Just search ‘CTF JISA transfer’ on Google to find a lot of options.