Changes in the economy, the way we buy houses and from central government, particularly with regard to higher education, means that saving for your children or grandchildren has never been more important.
The introduction of the new Junior ISA (Individual Savings Account) later this year may shake up the children’s savings market but in the meantime we thought we would take a look at some of the main things you need to consider when saving for your child or indeed grandchild’s future.
What are you saving for?
Being clear about what you are saving for is important, whether it’s school fees, the costs of university, that first car or a house deposit the deadlines come thick and fast.
Think about how long you have to save to meet a particular goal, for example if your child is newly born you will have at least 18 years to save for their University education, however if they have just started GSCE’s you probably only have four years or so.
Thinking about timescales is important because it plays a big part in deciding how much risk you should take. In theory the longer the time frame the more risk you can afford to take which might mean you are more likely to invest in equities (stocks & shares). Although equities carry more risk than deposit accounts they generally, although not always, outperform cash over a longer period of time.
Conversely, the shorter your timeframe the more likely you are to want to avoid the volatility which comes with equity investments and prefer the safety of cash.
Having a savings goal will also help to quantify how much you need to save. Start with your target amount and work backwards to ensure that you are saving the right amount each month to ensure you hit that target by the desired date.
Whose name do you save in?
This is one of the most common questions we get asked and there is no right or wrong answer.
Holding the savings in your child’s name generally means that at 18 they can access the lump sum which has been built up. This may not be desirable; your idea of what your child should spend a lump sum of money on might be very different from theirs!
On the other hand saving in your child’s name, perhaps in an existing Child Trust Fund (CTF) or a new Junior ISA can make the savings very tax efficient, it might also help to educate your child on the benefits of saving, something which is rarely taught formally in schools.
Saving in your own name potentially provides more control over when the savings are used and also what they are spent on. They can also be equally as tax efficient if an ISA is used.
It really comes down to a question of control, do you want it to be you or your child who decides when and how the savings are spent? Every situation is different, but perhaps the answer is to split the savings, hold some in your child’s name to encourage the savings habit and some in your name to retain an element of control.
How does the Junior ISA work?
The rules have not been completely confirmed by the Treasury but it looks as though the Junior ISA will in many ways mirror the existing version available for adults.
Children will be able to save up to £3,000 per year into a Junior ISA, although recent press speculation has indicated this may be increased to £3,600. Like the adult version the Junior ISA will have both cash and equity options and any money withdrawn from the ISA will be tax free.
There is still some confusion over who will be eligible for the Junior ISA. When it was announced the Treasury confirmed that existing CTF holders would not be able to open a Junior ISA. This has caused concern that a two tier savings culture could be created with banks and building societies offering a lower rate of interest on CTFs because they can no longer be opened. Again, recent press reports indicate that the Treasury might be considering overturning their original proposals and allowing any child to open a Junior ISA, although this is still to be confirmed.
So, should I save into an ISA, a CTF or something else?
The vehicle you save into depends on how much risk you want to take and whose name you want to hold the savings in.
If you want the savings to be held in your child’s name then it is probably best to start with a CTF, this allows savings to be held in cash or more risky investments, meaning it can cater for a range of investors.
Once you have paid the maximum amount each year into a CTF, currently £1,200, additional money you want to save in your child’s name you could be paid into a children’s savings account if you want to invest in cash. Although be aware you might have to do some pretty tough shopping around to get anything like an attractive rate of interest. The follow links take you to our best buy savings accounts for children:
Instant access and notice accounts
If you are saving in your own name again an ISA is probably the place to start. The adult version allows £10,680 to be invested each year with up to £5,340 saved in a Cash ISA. These limits are per person, so a couple could save over £20,000 on behalf of their children each year. This is generally enough for most people, however if you have more to put aside in a particular year you could look to National Savings & Investments Index Linked Certificates which provide a tax free return to cash investors or a Unit Trust / OEIC (Open Ended Investment Contract) if you want to take more risk with your money.
Don’t forget the ‘what if’
Building up a lump sum of money for your child or children is important, but what if illness or even death means that these monthly savings have to stop?
Make sure you make provision so that if you are seriously ill or you die before your goal has been reached there are sufficient funds in place for your child.
Life and critical illness cover are never the most pleasant things to discuss, however protecting your children from the financial effects of something happening to you or your partner is just as important as building up a lump sum of money and it might cost less than you think.
Final thoughts
Changes in the economy, the housing market and by government means that saving for children has never been more important.
Start by thinking about how much you can save each month, what your goals are and how much risk you want to take, also consider whose name you want to hold the investment in, yours or your child.
Once you have made these decisions it will be easier to work out which savings route you should take.
If you would like to discuss your existing savings or starting to save for your child do not hesitate to call one of our independent advisers today on 0115 933 8433 or email info@investmentsense.co.uk. All our advisers are experienced in this area of financial planning and would be delighted to hear from you.
