3 ways to save for your children or grandchildren

Each year, on 20 November, the United Nations World Children’s Day advocates, promotes and celebrates children’s rights.

Since 1959, when the UN General Assembly adopted the Declaration of the Rights of the Child, countries around the world have used the day as an opportunity to raise awareness of children’s issues.

To mark World Children’s Day, we thought we’d have a look at a few ways that you can give your child or grandchild a great financial start. Here are three ways to save for the youngster in your life.

1. Children’s savings accounts

One of the simplest ways to get your child or grandchild into the savings habit is to open a traditional children’s saver account at your local bank or building society.

You can normally open an account for any child up to 18 years old with just £1. This will often be a passbook account and, as up to £85,000 of your savings is covered by the Financial Services Compensation Scheme, you know the cash is safe.

A children’s saver account is a good way to teach a child how to handle their money, as they can typically start managing the account from the age of seven.

The downside of this type of account is that you’re likely to receive a paltry return on the savings. As of 6 November 2020, the best easy access savings account in the UK paid just 0.75% interest – and even then, you must manage the savings online or through a mobile app.

If you’re prepared to give notice before making a withdrawal, then Moneyfacts says you might be able to achieve a 1% return on your savings – although this will still only boost your child or grandchild’s savings by a £1 for every £100 you put away.

Low interest rates mean a child’s savings are unlikely to keep pace with rises in the cost of living. So, if you’re using a traditional account to save long term for a child, the value of their savings is likely to diminish in real terms.

2. Junior ISA

A Junior ISA can be useful if you want to build up a lump sum that your child or grandchild can access when they turn 18. Although only a parent or guardian can open a Junior ISA, anyone can make contributions to it, up to the annual subscription limit (£9,000 in the 2020/21 tax year).

The child can run the account from age 16 but can’t access the money until their 18^th birthday. Remember that the child will get access to the money when they turn 18 and you’ll lose control of the savings. It can pay to include your child or grandchild in your financial planning discussions so you can make decisions together on how they may want to use the funds.

There are two types of Junior ISA.

Cash Junior ISA

Cash Junior ISAs are easy to manage and can result in a good nest egg for your child or grandchild. The main benefit of a Cash Junior ISA is that any interest you receive is paid tax-free.

While interest rates can be better than the equivalent easy access accounts – there are several Junior ISA providers paying 2.5% AER or more currently – they still tend to be low, and your returns may not keep up with rises in the cost of living.

Stocks and Shares Junior ISA

A Stocks and Shares Junior ISA lets you invest in shares, bonds, and other eligible investments on a child’s behalf. Again, you can invest up to £9,000 a year (tax year 2020/21) and you don’t pay any tax on income or capital gains from investments in an ISA.

While Stocks and Shares Junior ISAs can produce higher investment returns compared to the interest earned from a Cash Junior ISA, your capital is at risk.

The Times has calculated that, with an average 5.5% growth rate, if you invested £9,000 in a Stocks and Shares ISA each year, this would produce a lump sum of £279,924 when your child or grandchild turned 18.

This compares to a Cash ISA, where an average interest rate of 1.95% would see the same £9,000 annual contribution turn into just £195,000 in 18 years.

Remember that the value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

3. Pensions

If you want to take a very long-term approach to saving for a child or grandchild, you could consider starting a pension.

Pensions allow you to save tax-efficiently. Any contributions you make, up to a limit of £2,880 a year, still benefit from tax relief. This means the government will top up the contribution and £3,600 will be invested.

Even small contributions to a pension can generate considerable investment returns over the decades, and this could help set your child or grandchild up for their retirement. You can make contributions whenever you want, and the pension will automatically transfer to your child once they turn 18.

The main downside to starting a pension for a child is that they won’t be able to draw from the savings until they are aged 57 or older. While the returns over decades could be substantial, your child or grandchild won’t be able to access the money earlier, for example, to fund their university education or to buy a first home.

Also, keep in mind that a pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. The child’s pension income could also be affected by the interest rates at the time they take their benefits.

Get in touch for help

If you want to explore ways of saving for your child or grandchild, please get in touch. Email enquiries@blackswanfp.co.uk or contact your adviser on 020 3828 8100.