Financial planning for children can help you build a pot of money to give them a financial head start, whether that’s paying university fees, providing a house deposit, funding a wedding or simply building long-term wealth.
The earlier you start, the longer your money has to potentially grow. However, choosing where to put the money is important because different savings accounts, investments, ISAs, pensions and trusts have very different rules around tax and when the child can access the money.
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Decide What You’re Investing For
Before choosing an investment, consider what you ultimately want the money to be used for and when it will be needed.
If you’re saving for university fees in ten years, for example, your approach could be very different from investing towards a child’s retirement many decades in the future.
You should also consider how much you can afford to contribute without compromising your own financial security and whether you want the child to have complete control over the money when they turn 18.
Financial planners can use cashflow modelling to calculate how much you may need to save today or contribute each month to reach a particular target in the future.
Junior ISAs
A Junior ISA (JISA) is one of the most straightforward ways of investing for children. Up to £9,000 can currently be contributed each tax year and investments can grow free from UK income tax and capital gains tax.
A parent or guardian must open the JISA, although grandparents and other family members can contribute.
The major consideration is control. The money belongs to the child and they can withdraw it once they turn 18. This makes JISAs attractive for building a tax-efficient investment pot, but potentially less suitable if you don’t want an 18-year-old to have unrestricted access to a substantial amount of money.
Investing Through Trusts
Trusts can provide greater control over money being invested for children.
With a bare trust, investments are held by trustees for the child and can be used for their benefit before adulthood, but the child ultimately becomes entitled to the assets at 18 in England and Wales.
A discretionary trust can provide considerably more control over who receives money and when. This can make them useful when larger sums are involved or when grandparents want to make gifts that could benefit several generations.
Trusts can have complicated tax consequences, however, so professional tax and financial advice can be particularly valuable.
Investing in a Pension for a Child
You can even start a pension for a child.
Up to £2,880 can be contributed to a child’s pension each tax year, with basic-rate tax relief increasing this to £3,600.
The enormous potential advantage is time: money invested when a child is young could potentially compound for decades. The obvious disadvantage is that the money is locked away until much later in their life.
As Saltus points out, this could be restrictive if your child would benefit more from the money earlier—for example, when buying their first home.
Should You Invest in Your Own Name?
Another option is simply to keep investments in your own name and give the money to your children later.
This provides considerably more control because you decide when and how much to give them. However, you need to consider your own ISA allowances, capital gains and income tax position as well as potential inheritance tax implications.
Financial planning can help determine whether investing directly for your child, using a trust or retaining the investments yourself is most appropriate for your circumstances.
How Financial Planners Help With Investing for Children?
Financial planning firms like Saltus provide financial planning and investment management and can help families consider how investing for children fits into their wider finances.
Its advisers can help assess the different ways of putting money aside for children, including savings accounts, Junior ISAs, junior pensions and investments held in your own name. Saltus highlights that the right approach depends on your individual circumstances rather than there being a single best account for every family.
This becomes particularly important for wealthier families where investing for children can overlap with estate and inheritance tax planning. Saltus says its advisers can guide families through their options and help them determine an appropriate approach for their circumstances.
Saltus generally works with individuals and households with £250,000 or more to invest, which can include pensions, ISAs, other tax wrappers and cash available for investment.
For parents and grandparents with substantial assets, professional financial planning can therefore help answer two important questions: how much can you afford to give your children without compromising your own financial future, and what is the most appropriate way to give it to them?