Investing for Children/Grandchildren

Many parents want to put money aside for their children to help them out in the future, whether that’s for a house deposit, university fees or something else; but where is the best place for those savings? There are various options available to put savings away for children (or grandchildren, nieces, nephews, godchildren, …) and the most appropriate will depend on each family’s circumstances and what they want their children to use the money for in the future. The following points provide a summary of the main types of savings used for children and grandchildren.

• Cash Savings Accounts

A traditional cash savings account offers a low risk option for children’s savings, with most accounts offering better interest rates than regular cash accounts. Holding funds in cash means there is no risk of the value going down but the potential for growth is low. You also need to be wary of inflation reducing the real value of the savings if they are held over a long period.

Children are entitled to the personal savings allowance which allows up to £1,000 of interest to be paid tax free meaning little or no tax is usually payable on cash savings in children’s names.

• Junior Individual Savings Account (JISA)

A JISA offers all the same tax advantages as a regular ISA, with no tax paid on income or gains on the funds held. A JISA needs to be set up by a parent (or guardian) for a child under the age of 18, but anyone can pay in to the JISA including parents and grandparents. There is a limit to the amount that can be paid in to a JISA each year – for the 2022/23 tax year the maximum allowance is £9,000. Any funds held within a JISA cannot be accessed until the child that owns it turns 18. From age 18 the JISA then becomes an adult ISA and is fully controlled by the child, including being able to withdraw funds as they wish.

The money in a JISA can be held in cash (in a Cash JISA) or invested (via a Stocks & Shares JISA). A Cash JISA has more or less the same benefits and limitations of a savings account with the addition of being tax free (it’s low risk, but growth is limited to the interest rate offered). A Stocks & Shares JISA offers the potential for long term investment growth however, as with any investment, the value will fluctuate and there is the possibility of getting back less than was invested.

It’s important to be aware that a child cannot hold both a JISA and a Child Trust Fund (CTF). This is relevant to any child born between 1^st September 2002 and 2^nd January 2011 and it should be checked that a CTF is not held before opening a JISA. It is possible to open a JISA in this case, but the CTF would need to be transferred before making further investments into the JISA.

• Pensions

Investing into a pension for a child offers an extremely long term investment as they cannot access the funds until age 57 under current pension rules. Whilst held within the pension the funds will grow tax free.

For most children the total amount that can be paid into a pension will be £3,600 per year, as the normal pension contribution rules apply that limit contributions to the higher of total earnings (subject to the annual allowance) or £3,600 per year. Pension contributions will also receive tax relief where the Government contributes 20% of the total amount paid in – this means that for a £3,600 pension contribution, a net payment of £2,880 is made with the remaining £720 paid by the Government as tax relief.

• GIA/investment fund portfolio

A General Investment Account (GIA) allows parents to set up an investment portfolio that they retain control of as it is not in their child’s name, often designating this with their child’s initials to make it easily recognisable. The GIA can therefore remain invested for as long as the parent wants it to before allowing their children access to the funds.

As the account is in the parent’s name, the investments are fully taxable on them. All the usual tax allowances are available, including the dividend allowance and capital gains tax allowance. This can mean income and gains can be managed tax efficiently but it is important to be aware of any other investments that are held that may already use these allowances such as shares held by the parent setting up the account.

• Trusts

Trusts offer a more complex arrangement for holding money for the benefit of children but can also provide greater control and flexibility where this is required. This is often the case where clients are looking to incorporate inheritance tax planning into their wider financial planning strategy and wish for their children or grandchildren to be the beneficiaries of their wealth in the future.

There are several types of trusts that can be used and we will be covering this in more detail in a future blog on Inheritance Tax and trusts. The main types of trust for the benefit of children or grandchildren are:

• Absolute Trusts – also known as bare trusts, the beneficiaries become absolutely entitled to the money held at age 18. A bare trust can be set up to benefit more than one person, however the amount that a beneficiary is entitled to is set at outset and cannot be changed. In addition, no new beneficiaries can be added at a later date. There is no limit on the amount that can be paid into a bare trust. Any tax on the investments held falls on the beneficiary, unless there is taxable income of over £100 per year generated which becomes taxable on the parent.
• Discretionary Trust – offering greater flexibility than a bare trust, a discretionary trust can benefit a range of “classes” of beneficiary – for example, all children or grandchildren of the settlor. This can be helpful if there is a need to add more beneficiaries in the future, such as future grandchildren. The trustees of the trust – often parents or grandparents of the beneficiaries – are ultimately responsible for the decisions on investments and for distributing the trust assets to beneficiaries, allowing a high level of control. The investments can be held within the trust for as long as the trustees see as appropriate and there is no legal requirement for beneficiaries to access the funds at age 18 meaning these trusts can go beyond this age unlike bare trusts or Junior ISAs.

Your capital is at risk. The value of your investment can go down as well as up and you may not get back the full amount you invested. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.

The information featured in this article is for your general information and use only and is not intended to address your particular requirements. Five Wealth Ltd offer independent financial advice to a wide variety of clients, at various stages throughout their financial planning journey. If you feel that our expertise would be beneficial to you, please get in touch.

The information contained within the article is based upon our understanding of HMRC legislation and practice at the current time. Allowances, reliefs and other tax legislation is subject to change and depends on the individual circumstances of the investor.