Parents and grandparents are increasingly giving children money instead of buying them gifts for Christmas and birthdays. The future for our young is paved with the need for bigger deposits to buy a home, higher education costs and of course inflation. Whilst some may criticise for showing a lack of imagination, in the long run it can bring more long term happiness than this year’s long forgotten top toy.
Savings accounts and premium bonds are familiar ideas but two less considered options are pensions and ISAs.
Children are allowed to have up to £3,600 paid into a pension each tax year, despite the fact they are unlikely to be earning. Realistically it will be relatives paying on their behalf. However, the child still receives the tax relief, with contributions grossed up by 20%. Therefore for the maximum £3,600 to be paid in you only pay £2,880. If you were to pay a more typical £100 into a pension £125 would actually be invested.
It may seem extreme to consider pensions for a child but money paid in early can really make a difference. If you paid £100 after tax relief, left it invested for 50 years, assumed a 5% growth rate after charges it would be worth £1,146.
Currently you cannot access your pension until you are at least 55 – often considered a disadvantage. However, you may be pleased that they cannot access this money at 18 when they may not spend it appropriately.
As with their adult equivalents you have both a savings account version and an investment version of a junior ISA. Which is most appropriate depends on attitudes to risk and the child’s age. Generally speaking the younger the child the more likely it is that the investment option will be appropriate. The maximum that can be paid in is £4,080 each year, but you do not get tax relief, so a £4,080 contribution costs you just that. The money grows tax free and the account is theirs to do with as they wish when they are 18. So this year consider a gift that gives your children and grandchildren more than just a Happy Christmas!
By Richard Cohen FPFS ACII MCSI Chartered Financial Planner
For more details visit www.nsurefinancial.co.uk or to arrange a free review please call 01903 821010