Saving for the next generation: What options are there?

Posted on April 25th, 2019 | Categories - Savings

More than half of adults had a savings account opened for them when they were children. It’s a tradition that many are keen to continue by building up a nest egg for the next generation.

According to research from NS&I, opening a savings account for a child has become increasingly popular over the generations. Only 15% of those aged over 65 had an account opened for them between 0 and 5. For those now aged between 16 and 24, the figure has risen to 31%. It’s a step that could give a youngster a helping hand when they reach adulthood, whether it’s used to support them through university or purchase a first home. It could also pave the way for a positive saving habit.

There are several different options to consider when choosing how to save for the next generation.

Child Trust Fund

If you’re making plans to start saving for a child, the first thing to check is whether they have a Child Trust Fund. These are now defunct but some six million young people have one of these accounts. All children born between 1 September 2002 and 2 January 2011 will have a Child Trust Fund, even if you didn’t open one for them. These accounts will have been opened with a government contribution and may have benefitted from later additions too.

Whilst you can’t open a new Child Trust Fund, you can continue to add to one that already exists. Each year you can pay £4,260 into a Child Trust Fund, which can either be held in cash or invested. At the age of 18, the child will be able to withdraw the funds.

Junior ISAs (Individual Savings Account) replaced Child Trust Funds. If you choose you can transfer the money held in a Child Trust Fund into one of these.

Junior ISA

A Junior ISA (JISA) can be opened for anyone under the age of 18. The annual subscription limit is currently £4,368, which can be added to a single account or spread across several. Like their adult counterparts, interest or investment gains are not subject to tax.

From the age of 16, the child can take control of the account, for example, selecting investments. However, they cannot withdraw any money until they reach the age of 18, at which point it will be converted into an adult ISA.

There are two types, a Cash JISA and a Stocks and Shares JISA.

A Cash JISA will provide interest on deposits and the money is secure under the Financial Services Compensation Scheme. This provides you with certainty and often JISA interest rates are more competitive than adult ISAs. Despite this, you should still consider the potential impact of inflation, which can reduce the spending power of savings over the long term.

Money deposited in a Stocks and Shares JISA will be invested. This means they are riskier but could result in a bigger profit when compared to Cash JISAs. You will typically be able to choose from several different investment risk profiles. Often, investing is a good option if you’ll be saving for more than five years, giving you an opportunity to ride out market volatility. However, it’s important to keep in mind that the value of a Stocks and Shares JISA can go down, as well as up, and you may get back less than you put in.

Savings accounts

Of course, regular children’s saving accounts are also an option and there’s plenty of choices here.

An easy access account, for example, can be a great way to get children into the savings habit themselves with short or medium saving goals in mind. With the ability to access savings when you want to, it’s a flexible way to build up a nest egg.

If you want to access better interest rates, fixed term saving accounts may be an option. This is where you’d lock the savings away for a pre-defined amount of time, for example, three years. You won’t be able to access the money deposited during this time without forfeiting the interest, but for longer-term goals, it means getting more from your money.

Premium Bonds

Parents and grandparents can purchase Premium Bonds for children. These are backed by HM Treasury and you can withdraw the money put in at any time. The minimum you can purchase is £25.

Premium Bonds don’t pay interest. Instead, each money holder is entered into a monthly prize draw, with winners receiving the prizes tax-free. Prizes range from £25 to £1 million. As an average, Premium Bonds pay an interest rate of 1.4%, but there is a chance you’ll receive nothing at all on the bonds held for your child or grandchild. As a result, if you want to generate guaranteed returns, Premium Bonds probably aren’t the right option for you.

If you’d like to discuss the options you have when saving for a child’s future, with your financial plan and aspirations in mind, please contact us.

Please note: The Financial Conduct Authority does not regulate National, Savings and Investments (NS&I) and Deposit Accounts.

The value of your investments can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.

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