Does a tearaway toddler need a pension? Is it time to start saving for a newborn grandchild’s house deposit? There are tax wrappers designed to stash funds for a child’s future, but with parents already contending with the cost of raising children (£232,000 per child by the age of 21 according to the Centre for Economics and Business Research, and that doesn’t include any school or university fees) it can be difficult to know what to prioritise.
One of the most popular options are junior individual savings accounts (Jisas), which recently celebrated their tenth birthday. These childhood nest eggs lock money away until your offspring turns 18. Only a parent or guardian can open one, but anyone can pay in, up to a total limit of £9,000 per tax year. As with an Isa, no tax is paid on the gains and they also come in both cash and stocks and shares variants.
“More than one million plans were paid into last year,” says Rosie Murray-West for The Mail on Sunday. Unfortunately, more than two-thirds of Jisas opened last year were cash. Given that the money is being put aside for up to 18 years it is a shame to forego the potential long-run returns from investing in stocks, especially with inflation decimating cash savings. One hundred pounds invested into a typical cash Jisa every month over the last decade would today be worth £12,680, according to calculations by AJ Bell. The same amount invested in the FTSE All Share would be worth £16,316.
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Some parents have invested more judiciously, says Claer Barrett in the Financial Times. Interactive Investor reports that over 1,000 of its Jisa accounts “contain £50,000 or more”; 110 are worth more than £100,000. Yet that could be a double-edged sword. Jisa funds belong to the child, and when they turn 18 (at which point the Jisa becomes a standard Isa) they can do as they please with them. Never mind saving for a deposit house – how about a designer handbag or supercar? Yet maybe parents worry too much: a poll of 250 teenagers by F&C Investment Trust and Opinium found that 70% planned to leave any Jisa cash where it is (22% vowed to spend it). It is just as important to teach the next generation good financial habits as it is to provide them with a financial safety net.
Children’s pensions
For those prepared to take a very long view, there are self-invested personal pensions (Sipps). Up to £2,880 (which turns into £3,600 after 20% tax relief) can be invested each year. Assuming a 4.5% annual return, a pot that had accumulated £20,000 by a child’s 18th birthday would be worth over £100,000 by the time they can access it aged 57 (assuming it’s still 57 then, which is highly unlikely), even without any extra contributions. Making pension provision for someone who won’t retire until the 2080s is certainly long-term planning, but it may not be the best choice. Wealthy grandparents might do better to provide for a child’s first steps in the adult world rather than their last.
As for parents, they should prioritise paying into their own pensions so that they don’t become a burden to their children in old age. Jisas and children’s savings accounts are fine as a place to deposit gift money and can be a useful way to impart lessons about the value of saving and investing. But it is best to focus on using up your own Isa and pension allowances first – that gives you flexibility if faced with a financial emergency and you can always hand over cash if the kids need it later on.
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