As financial planners, we know from experience that it is important to many people to pass their wealth down to the next generation. Below we outline the most common methods of investing for your children.
We will look at two of the most commonly used tax-efficient savings vehicles for children, Junior ISAs, and Child Trust Funds (CTFs).
Junior ISAs
Junior ISAs are long term, tax-free savings accounts for children which were introduced to replace CTFs in November 2011. Your child can have a Junior ISA if they are under 18, live in the UK, and aren't entitled to a CTF account.
How it works
You can put up to £9,000 per tax year into the account (as at 2020/21); the start date for the year is the 6th April and the end date is 5th April the following year.
Although only a parent or guardian can open the ISA on the child’s behalf (unless the child is over 16) anyone can add money to the account. Most accounts will allow you to contribute by cheque, standing order or direct debit.
If the allowance isn’t used in the year, you can’t carry any unused amount forward to the following year to make up the difference.
The money belongs to the child, but they can’t take the money out until they’re 18. If at this age they decide to leave the money invested, the Junior ISA becomes a standard ISA with the usual contribution limits. There’s no tax to pay on the income or profits the Junior ISA makes. It also won’t affect any benefits or tax credits you receive.
The account types for a Junior ISA are:
Stock & Shares Junior ISA
These invest your child’s money by buying shares or other investments in companies or other institutions. As with all non-guaranteed funds the value of these investments can rise or fall.
Cash Junior ISA
These work in the same way as a bank or building society account in that the money invested is secure and earns interest. The contribution limit takes into account both types. So for example, if your child has paid £1,000 into their cash Junior ISA from 6 April 2019 to 5 April 2020, up to £8,000 could be paid into their stocks and shares Junior ISA in the same tax year.
Child Trust Funds
A Child Trust Fund (CTF) is a long-term tax-free savings account for children which is no longer available for newborn children but remains open to existing account holders.
Your child is entitled if all the following apply:
they were born between 1 September 2002 and 2 January 2011
you were paid Child Benefit for them for at least one day before 4 January 2011
your child lives in the UK
How it works
You can put up to £9,000 a year into the account; the start date for the year is the child’s birthday and the end date is the day before their next birthday. Anyone can add money to the account, not just parents. Most accounts will allow you to contribute by cheque, standing order or direct debit. If the allowance isn’t used in a year, you can’t carry any unused amount forward to the following year to make up the difference.
The money belongs to the child and when they are 16 they can take over the account and manage it themselves; however they can’t take the money out until they’re 18. There’s no tax to pay on any income or profits the CTF makes. It also won’t affect any benefits or tax credits you receive. If your child isn’t eligible for a CTF account, you may be able to open a Junior ISA for them instead (see above).
A government led consultation on allowing CTF funds to be transferred to Junior ISAs is currently underway, with the deadline for public feedback having now closed. We anticipate that the government will approve this change once the process has been completed.
The account types for a Child Trust Find (CTF) are:
Stakeholder accounts
These are offered by all CTF providers, who have to follow government rules, including:
investing the money in a number of companies, not just one
moving the money to lower-risk investments when your child is 13
a limit on charges taken by the investment manager of 1.5% per year
These rules help protect your child’s money by avoiding having all their eggs in one basket and reducing the risk of a sudden stock market decline affecting their maturity value. However, the range of investment funds available may be limited in comparison with a non-Stakeholder account.
Non-Stakeholder stocks and shares accounts
These invest your child’s money by buying shares or other investments in companies or other institutions. As with Stakeholder accounts, the value of these investments can rise or fall. The range of investments available will be greater than a Stakeholder account but there may not be any movement of money to lower risk investments as the plan nears maturity and the charges taken by the investment manager may be higher.
Savings accounts
These work in the same way as a bank or building society account in that the money invested is secure and earns interest.
It’s Not Just About Money
It’s important to recognise that these decisions aren’t always simply about money (in fact, they rarely are). As always, clear intention and good communication is paramount, and it’s here that your adviser at Chesterton House can really help. Our expertise in ‘Values-Based’, family-oriented financial planning and long experience in helping people to make great decisions about complex issues can be really helpful in formulating a successful plan.
There are a number of considerations when investing for children, such as; how long the money will be invested for; the most suitable form of savings; when you want them to be able to gain access to the money; who is giving the money to the child; how the money will be managed; and others. Getting good advice can be valuable in making good decisions that are in the child's best interests.
If you'd like a more thorough understanding of investing for your children for Junior ISAs, Child Trust Funds and Pensions, please read our extensive guide.
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