Investing for children
For many of our clients, investing in the future security of their children or grandchildren is one of the highest financial planning priorities. Not only does it mean that they start their adult life with some savings – useful for purchasing a car or even for a deposit on a house – but involving them early in selecting and keeping track of financial products teaches them some essential practical lessons about money management.
Here is a brief guide to the options when saving for a child.
Children’s savings accounts
Children can start managing their own bank or building society savings account from the age of seven. This is a great way for them to learn how to manage money and get used to saving as well as spending. Many providers offer a free gift like a money box and you can generally start such accounts with as little as £1. Most of the accounts are instant access and pay a fairly low rate of interest, which is generally taxed unless you fill in a HMRC R85 form which means the interest will be paid in full without tax being taken off.
Child Trust Funds
These were tax-free schemes, introduced in 2002 to ensure that every qualifying child has a savings account at the age of 18, however they have since been replaced by Junior ISAs (see next section). Those with existing accounts or vouchers (which were for £50 or £250, depending on when the child was born) can keep their Child Trust Funds (CTFs) running until the child turns 18.
CTFs were available to children born between 1 September 2002 and 2 January 2011 but have now been replaced by Junior ISAs. If your child was born after 2 January 2011 or before 1 September 2002 (and is still under 18), or didn’t qualify for a CTF, they can get a Junior ISA instead.
Contact Marchwood IFA if you want to know more about whether your child qualifies for a CTF and whether you might be able to transfer a CTF into a Junior ISA from April 2015.
Junior ISAs
Children born after 2 January 2011 or before 1 September 2002 (and are still under 18) qualify for a Junior ISA. Parents or guardians have to open the Junior ISA account, but the money belongs to the child, although they cannot get access to it until 18. Each child can have one Junior cash ISA and one Junior stocks and shares ISA during their childhood, unlike the adult versions which are an annual contract. Junior ISAs can still be transferred between different providers, however.
Junior cash ISAs – these work the same way as a standard bank or building society savings account, except they are tax-free, without the need to complete a HMRC R85 form, and the money is locked up until 18.
Junior stocks and shares ISAs allow you to buy shares, bonds and other eligible investments on behalf of a child. They are classed as ‘tax-efficient’ because, although returns are free of Income Tax and Capital Gains Tax, there are other taxes payable on the investment such as taxes on dividend income which is 10% and cannot currently be reclaimed. The value of Junior stocks and shares ISAs can go down as well as up.
Limits – the Junior ISA limit is £3,840 per year until 1st July 2014 when it goes up to £4,000.
If the child is aged 16 or over they can have an adult Cash ISA and save up to £5,940 per year (until 1st July 2014, when it goes up to £15,000) as well as a maximum of £3,840 in a Junior ISA.
National Savings & Investments (NS&I) Children’s Bonds
A parent, guardian, grandparent or great grandparent can buy these bonds, for the child to own until they are 16, when they take over holding them. The bonds are sold in ‘issues’ that run for 5 years at a time. Each issue has a fixed rate of interest, added at the end of each year.
At the end of the 5 year period, the issue can be ‘rolled over’ into a new 5 year issue, until the child’s 16th birthday.
You can invest between £25 and £3,000 per issue and all the interest is tax-free.
Friendly Society tax-exempt plans
These children’s savings plans are only available through Friendly Societies, which are ‘mutual’ organisations, owned by members to work for the advantage of those members
These plans operate for between 10 and 25 years, with money invested in a stock market based investment fund (policy charges do apply). You can pay in a maximum of £25 per month. The maturity date comes when the plan is at least 10 years old and the child is at least 16. Just like Junior stocks and shares ISAs, the value of Friendly Society tax-exempt plans can go down as well as up.
As long as you do pay into one of these plans for at least 10 years, no Income Tax or Capital Gains Tax is paid.
Next steps
If you are interested in choosing the best option for your children or grandchildren, contact Marchwood IFA. We have a lot of experience in helping parents, guardians and grandparents (even great-grandparents) choose the most suitable investment to give children a sound financial start in life.