If you have a family and some money to spare, it’s never too soon to start saving for children.
Saving a little for a long time is the perfect way to fund university fees or even help with a deposit for a house, even though these milestones may be decades away.
Maike Curry, investment director/personal investing at financial firm Fidelity International looks at some of the misconceptions about saving for children – and gives some invaluable tips about how to go about building them a nest-egg.
Start a pension when they are born
Families can start a pension for a child of any age.
Although the maximum contribution is £3,600 a year, that includes tax relief, so the amount you put in is much less – up to £240 a month for basic rate taxpayers and £180 a month for a higher rate taxpayer. The rest comes as a tax break from the government.
“If you invest £300 a month for a child’s first 18 years, when they reach 65, the fund is worth around £567,258 even if no one makes any further contribution,” said Currie.
Watch out for tax
Children do pay income tax, but it’s unlikely they earn more than the personal allowance of £11,500 a year, but if the money comes from mum and dad and they earn more than £100 interest a year, then the parents may have to pay any income tax due.
Other relatives are outside the tax net, whatever they give – but the gift may attract inheritance tax if they pass away before seven years have passed.
Who controls the money?
Once a child celebrates their 18th birthday, any junior ISA rolls over into an adult account and control passes to the child.
With a pension, they cannot access the cash before they are 57.
“If you have a willful 18-year-old on your hands, then you might find yourself fighting a losing battle. But making a point of talking about your child’s savings and investments with them from as early an age as you can, getting them involved and showing them how it’s growing over the years is a good way to instil a savings habit in them that will hopefully pay off,” said Currie.