Emma Sterland, Director of Financial Planning and a Chartered Financial Planner at Tilney Best Invest and a local mother is passionate about getting children competent and comfortable with their own finances from a young age. She shares how she invests money for her daughter’s future for the short, medium and long term and how she will get her daughter thinking about her expenditure and the value of money from an early age.
Saving for children - how I think about it
Tomorrow and the short term
For me, this type of saving involves placing money in cash accounts. In today's world interest rates are very low and you are therefore unlikely to get much interest on this cash saved. This is money which is to be used in the shorter term and can then be used for activities such swimming lessons or buying larger presents/toys such as a bike. It can also be used to teach children about the value of money; for example, when they are older and asking for things, they can be told that they have purchasing decisions to make based on the money they have. They will hopefully learn the principles of opportunity cost swiftly this way.
It is important to be aware that children can only earn up to £100 in interest on any money gifted to them by a parent tax free. Anything over this will be taxed as if it were yours, as the parent, income. It could be beneficial to explore your options when looking for a home for his saving as your bank may not be the most competitive in terms of interest rates.
Next and future years
I save £50 a month into a regular savings account for my daughter’s future. This is an easier way to save as you are less likely to notice £50 a month leaving your account than a lump sum of £600 at the end of each year. I find that foregoing a coffee a day adds up to around £50 per month. At present, a Halifax ‘Kid’s Regular Saver’ could earn up to 6% per annum. This rate is much higher than most normal deposit accounts. However, there is a limit on the amount which can be invested. If I were to keep this up until my little girl is 18, she will have a lump sum of £10,800 plus interest. An alternative is to look for a young savers account which can accept a higher investment, with these currently paying up to 3% interest.
For when he/she turns 18
I would always start by using a junior ISA. Each child is now entitled to one and the current annual limit is £4,080. This can be saved monthly or adhoc. You can invest in cash or stocks & shares or a mix of both. The savings are then accumulating mostly tax free while they remain in the junior ISA structure. This is a tax efficient way of saving. Once the child reaches age 18, this will convert into a normal ISA of which they will have access. I save £50pcm into a Junior stocks and shares ISA for my daughter with Tilney Bestinvest. If I continue to contribute in this way until she is 18, she will have a lump sum of £10,800 plus interest/ growth. If you assumed a 5% compounded annual return after fees the value would be approximately £16,879 by aged 18.
Saving for post 18 with you keeping control
You will need to use a trust structure as this will allow you to have complete control over when you pay the proceeds to your child. Setting up a trust is a legal process and you will need the services of a solicitor for this. Trust structures can be complicated so ensure you know what is involved.
Very long term
Pensions, the annual contribution limit is £2,880, which is then topped up by the government to £3,600 – receiving 20% tax relief (assuming your child doesn't work). As with all pensions, access to monies would not be until age 55 (under current rules moving to 57). Growth within the pension is mostly free of Income Tax and Capital Gains Tax.
Disclaimer – Please remember to seek expert financial advice tailored to your own personal circumstances and please be aware that the above is illustrative of what the author has chosen to do in her own life. This article should not be regarded as an offer or solicitation to conduct investment business as defined by the Financial Services and Markets Act 2000. Past performance of investments is not necessarily indicative of future performance. The value of investments may fall as well as rise and the income from investments may fluctuate and is not guaranteed.