If you want to invest for your children there are two simple solutions available that not only allow you to build up a significant tax-free sum for them for when they are older, but also allow you to reduce your own taxes now.
Even if your children are already old enough to look after themselves these 2 solutions can also work for grandchildren.
Previous Solutions when you wanted to invest for your children
You may remember back in 2005 the Labour government at the time announced Child Trust Funds which were a savings/investment account for children.
The government very generously gave £250 to kick things off and provided another £250 at age 7.
Child Trust Funds have now been scrapped for anyone born after 2nd January 2011.
If you managed to get one set up before then it can still be used.
The first Child Trust Funds can now be managed by the child themselves, as it is 16 years this September since the date of birth the first accounts were eligible.
It is estimated that more than 1 million Child Trust Fund accounts have been ‘lost’ over the years so you may want to check whether you ever did set a Child Trust Fund or if not whether the government did it on your behalf.
You can find out whether a Child Trust Fund was ever set up for your child by using the government’s Child Trust Fund finder.
There are now two simple solutions that allow you to invest for your children.
#1 – Junior ISA (JISA)
The Junior ISA is pretty much a direct replacement for the Child Trust Fund but without the government bonuses.
Although a parent needs to set up a Junior ISA, anyone can pay into it until the child is 18.
At age 16 the child can manage it themselves but they can’t make withdrawals until they are 18.
Like a normal adult ISA there is an annual maximum allowance that you can pay into a Junior ISA (£4,260 for the 2018/19 tax year) and money inside a Junior ISA grows tax-free.
A child can have either a cash Junior ISA or a Stocks and Shares Junior ISA.
Subscribing to the current Junior ISA allowance every year for 18 years at an annual growth rate of 5% will provide your child with a cool £125,836.
Even if we adjust that final figure for inflation (at 2.5%) your child could still end up with £80,681 in today’s money.
If your feeling particularly generous there is a nice little quirk that a child can benefit from when it comes to ISAs.
At age 16-18 a child is not only entitled to a Junior ISA allowance but also an adult Cash ISA allowance. So if the child is 16 today you could pay in £24,260 and the same again next tax year!
#2 – Junior Self Invested Personal Pension (JSIPP)
If you would prefer that your children or grandchildren have to wait longer to access the money you invest for them then you could pay into a Junior SIPP.
This can help start their retirement pot as the child will not be able to access the pension until at least 55 currently.
Providing the child is under 18 you can set up a Junior SIPP and pay in up to £2,880 per annum. The beauty of this is that the government will pay in an extra 20% in the form of tax relief so your payment gets topped up to £3,600.
If you pay in the full amount each year and it grows at 5% per annum, your child or grandchild could have a nice £106,340 in 18 years time to start their retirement fund (£68,181 in today’s money).
So when you invest for your children how does this help you?
Income Tax
Let’s start with Income Tax. Perhaps you have used up your own ISA and pension allowances for this tax year. This could mean any other savings you have are subject to Income Tax.
Normally when you save in your child’s name, the child is only able to receive £100 in interest without you being taxed further. With a Junior ISA and SIPP, anything earned inside is tax-free.
Better still, if you are a high earner, by paying into a child’s SIPP your contribution is topped up by 20% so you are effectively getting some tax back and paying it into your child’s SIPP.
Capital Gains Tax
Just like Income Tax, anything you save into a Junior ISA and SIPP will grow tax-free meaning you or your child never have to worry about Capital Gains Tax.
Inheritance Tax
Everyone is entitled to gift up to £3,000 per year which is immediately outside your estate for Inheritance Tax purposes.
Remember the maximum contribution you could make to a Junior SIPP is £2,880 so under the allowance. Meaning not only are you providing for child’s future, you are also reducing your Inheritance Tax bill at the same time.
You could also use the allowance to partially fund a Junior ISA.
You can gift more than the £3,000 gifting allowance (perhaps if you have multiple children and grandchildren) but it just means you will need to survive 7 years for the extra gift to be deemed outside of your estate.
I love investment solutions that are a win/win for both you and your family and the Junior SIPP and ISA are definitely two solutions where this applies.
If you would like a more comprehensive review of how best to invest and save tax at the same time then please get in touch. There’s no charge for an initial consultation which could be very valuable to you even if it’s just to ask questions.
QUESTION: Have you set up a Junior ISA or SIPP? Which provider do you use and why? Please share your feedback on our Facebook page as this may help others.
Risk warning:
Stock market linked investments and any income from them, can fall as well as rise and is not guaranteed. Any figures quoted are for illustrative purposes and should not be taken as a forecast or guarantee. Past performance should not be seen as an indication of future returns and clients may get back less than they have invested.
