When it comes to saving, it’s easy to get caught up in planning only for yourself and your partner, or only thinking about the early stages of family life. But what about your children’s long-term financial future? If you don’t start thinking about providing a solid financial foundation for them now, it’s highly likely the Bank of Mum and Dad will face a bigger outlay later in life and have to help out then instead (think assisting with a house deposit…)
So, if you’re considering saving for your child’s future, there are a number of options available.
Whilst a cash savings plan is a flexible way to put away money over the years, the combination of inflation and relatively low interest rates will severely deplete the spending power of the fund you create. Therefore, you should look at options with the potential for longer-term, tax-efficient growth. The two most common are Junior Individual Savings Accounts (JISAs) and Child’s Pensions. But which one is best?
What’s the same?
Firstly, there are a few commonalities between the two:
– Both a JISA and a Child’s Pension can only be set up by someone with parental responsibility for a named child who satisfies the eligibility criteria.
– You can usually begin saving for your child by investing a relatively modest amount.
– Both are tax efficient as they are not subject to Income Tax or Capital Gains Tax on any investment growth.
– Paying into a JISA or a Child’s Pension does not affect your own personal ISA or pension allowance – they are treated completely separately.
– Other relatives can also pay into these plans, providing the total contributions do not exceed the annual allowance per child, which is set out below.
– Both can be invested into stocks and shares, however these should be considered as longer-term options.
– Both can be transferred to another provider at a later stage if you or your child wishes.
What makes them different?
There are a number of important differences between a JISA and a Child’s Pension which you should take into consideration when deciding which is the most viable saving option for your child.
A JISA allows you to contribute up to £9,000 in this tax year per child, whereas a Child’s Pension only allows you to invest up to £2,880. However, a contribution to a Child’s Pension receives government tax relief of 20%, so if you pay in £2,880 then £3,600 is actually invested.
Once your child reaches 18 years old, you’ll no longer be able to pay into a JISA for them. However, with a Child’s Pension, there is no limit on when you can pay into it, so you can continue paying on their behalf for as long as you wish (although you should be aware that tax relief will be based on the child’s circumstances and subject to the rules on annual allowances).
There is no limit on the amount that can be built up over a lifetime in a JISA and withdrawals are tax free. However, only up to 25% of a pension can be taken tax free, with the rest being taxed as income. As well as this, withdrawals over the current lifetime allowance of £1,073,100 will attract a tax penalty of either up to 55% when taken as a lump sum, or 25% if taken as income, as well as paying the marginal rate of Income Tax.
If you are saving into a JISA for your child, they will have the opportunity to take the reins of their own strategy from the age of 16. However, they’ll not actually be able to access the funds until their 18th birthday, at which point, they can either withdraw the money and spend it as they wish, or transfer the funds to an adult ISA.
With a pension, your child can take control of their plan from 18 years old, but the funds cannot be touched until they reach 55 (57 from 2028). This age could increase in the future, so you should consider carefully what your intention is for these funds (i.e. if you’d like the fund to contribute towards a house deposit for your child in their 20s, then a Child’s Pension would not be a viable option). However, if you were to pay the full maximum amount of £2,880 (£3,600 with tax relief) into a Child’s Pension from birth until they reach 18, and the investments achieve annual growth of 5%*, the benefits of compounding interest mean the child could have a pension worth more than £580,000 by the time they reach 55 – an amount not to be sneezed at!
Which should you choose?
When assessing your options, the key things to really take into consideration are: the financial goals you envisage for your child; the age at which you want them to access the money; and the tax treatment when they do so.
A JISA may provide your child with a great start to adult life, but a Child’s Pension could help fill a savings gap in later years. As future generations are now living longer, there is an ever-increasing need for more money in retirement.
So, as you start to map out an early savings plan, you should perhaps consider both solutions – not only giving them a financial leg-up in their early adult years, but also helping to provide more financial security in future decades too.
Working with you, we can help make the right decisions when it comes to supporting your family and their financial future. If you’d like to know more, contact us today.
The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.
An investment in equities does not provide the security of capital associated with a deposit account with a bank or building society.
The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.
*This figure is an example only and not guaranteed – it is not a minimum or maximum amount. What you get back depends on how your investment grows and the tax treatment of the investment. You could get back more or less than this.