Many parents opt to gift money to adult children, to help them with first property purchases. This strategy can, however, lead to an inheritance tax charge, due to the seven-year rule. It also may not be possible, due to your own retirement needs, to gift very large one-off sums. Investing for children can be a valuable alternative.
Early investing can lead to a large nest egg
Starting a child’s investment journey at the earliest point can leave them with a larger sum, and provide flexibility in later life. Junior ISAs, or JISAs, and junior self-invested personal pensions (junior SIPPs) are an excellent way to start your child’s (or grandchild’s) investment journey and build up a valuable nest egg for use in later life.
Tax-free gains with JISAs
A stocks and shares JISA can be opened from birth, and up to £9,000 can be subscribed in each tax year, with any gains free from tax. For many people paying the maximum £9,000 annual allowance into a child’s JISA won’t be possible. But as the illustrative example below shows, paying in just £240 a month (£2,880 per year) up to age 17 can provide a large pot, whether it’s used to cover university fees, a first property purchase, or held back for later life.
Tip: If grandparents contribute alongside parents this can split the costs, or allow more to be subscribed in each month or tax year. Consider the table scenario (below). Contributing the full £9,000 annual allowance until age 17 and seeing a 4% annual return would grow the JISA to £250,000 by age 18, and well beyond £1,000,000 by age 57.
Tax relief on junior SIPP contributions
Junior SIPPs are often overlooked by parents as a means to invest for children, as they are ringfenced until later life (age 57 from 2028). The annual allowance is less generous than for JISAs, with a maximum of £2,880 allowed to be paid in in each tax year. However, the government provides 20% tax relief on these contributions, adding a top-up of £720, to give a total possible contribution of £3,600.
This generous tax treatment, which isn’t available for JISA contributions, can be very beneficial. Paying in small monthly contributions (£240) can lead to a huge pot for children in later life, which they can put towards their retirement plans – see table.
Tip: Parents who are cautious about handing over large financial assets to their offspring at age 18 (the age when JISAs can be accessed by the beneficiary) may prefer this option. Bear in mind that withdrawals from a junior SIPP beyond the 25% tax-free lump sum are subject to income tax, under current tax rules.
The power of compounding
Whichever option you choose, compounding returns, which see your ‘investment snowball’ get bigger with each roll, can be hugely valuable when building a pot of money for your children. This can be put towards university fees, a house deposit, or act as a nest egg for retirement.
Tip: A JISA or junior SIPP can be set up from birth, providing a long-term and tax efficient investing option. Starting your children’s snowball from the top of the hill, rather than halfway down, can be hugely beneficial over the long term.
Want to find out more about investing for your children’s future? Call 03300 564 446 to speak to one of our experts, or get in touch via our contact form.
This article is for general information purposes only and does not constitute financial advice or a personal recommendation. Past performance is not a reliable indicator of future results. Investments can rise or fall in value, and you may receive less than you originally invested. Tax treatment depends on individual circumstances and may change in the future.
