When your children reach the age of 18, they will begin to make decisions about their future that could have great impact on their lives. They may want to go to university, buy a first car, or could even be looking to put a deposit on a first home.
However, the challenges facing younger generations continue to increase, as the costs of higher education, running and maintaining a car and buying a home all continue to rise. One great way to help you children combat these costs, is to save regularly and tax-efficiently for their future.
When you save tax-efficiently, the increase in value of your money, whether this is interest in a cash-based account, or growth in an investment account, will be free from tax, as will the final lump your child receives at the end of the plan. The advantages of this over a normal bank account are obvious; as if you decide to save in a bank account you will be taxed on its growth and final value.
How to save tax-efficiently – the Junior ISA
There are a number of ways you can protect your child’s money under the ‘tax umbrella’. The most popular is to open a Junior ISA, an account similar to a normal ISA that allows you to save up to £3720 per year* for any child aged under 18 who does not already have a Child Trust Fund. There are plenty of providers to choose from, and searching the market will help you to make an informed choice.
Cash or Stocks and Shares
When you start looking for a Junior ISA, you will notice that you are able to open either a cash account or a stocks and shares account.
The difference between the two is quite simple. A cash ISA is basically a savings account that pays interest tax-free, while the stocks and shares account will add growth to your investment that depends upon the performance of the fund your money is invested within.
Choosing between the two really depends on your attitude to risk, and your ambition for the growth of your child’s savings. A cash account is a safer option, but offers lower potential growth, while in a stocks and shares Junior ISA the value can go down as well as up.
It’s not all black and white though, if you choose to invest in stocks and shares there are a number of providers that offer lower-risk investments, and you can also choose to invest in funds of your choice with some providers.
Opening a Junior ISA
Most providers will give you the option to open a Junior ISA online. When you do so you can usually choose a payment plan that suits you, either contributing to the plan monthly from as little as £10, or paying in lump sums as and when it suits you.
Once opened, your child’s Junior ISA will run until they reach the age of 18, at which point they can decide to open an ISA and continue saving, or to take the money.
Already got a Junior ISA?
If you have already opened a Junior ISA for your child, and have reached the annual limit, then there are a variety of other tax-efficient savings plans you can open alongside the current plan.
Friendly societies are a good place to start when looking for tax-efficient savings plans for your children. These plans will vary in name and how they work depending on which provider you look at, so again it is a good idea to search the market and make a decision based on your personal circumstances.
So, instead of looking at savings as for a ‘rainy day’, why not start saving to help your children make the best start possible to their adult lives, with a tax-efficient children’s savings plan.
For more information please visit www.shepherdsfriendly.co.uk
*Correct as of tax year 2013/2014