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03 September 2021

Investment and Savings Products for Children

Every family wants to give a new child the best start in life but most are often unaware of the options available to provide a financial head start for the newest family member. Cash is often put away in a standard bank account until needed for one of the big moments in life, but this may mean missing out on the potential for significant growth. In the current environment of almost 0% interest rates, it is important to ensure your money is working hard. Therefore, we assess some of the options available.
 
Junior ISAs
The benefits of ISAs are well publicised, with everything held in the ISA being shielded from tax. Stocks and Shares ISAs and JISAs, such as those offered by Redmayne Bentley, can be held on an execution-only basis or managed by an investment manager. Returns do depend on investment performance, but all income and gains are shielded from tax. The limit for the 2021/22 tax year is £9,000 and the child can take control of the account when they are 16, but cannot withdraw the money until they turn 18– although for these two years they are eligible to hold both a JISA and an adult cash ISA, providing a further boost to tax-free savings for two years. However, the money belongs to the child and at age 18 and they are entitled to do as they please with it and their parent/ guardian retains no power over the account. It is also worth noting that money added to the ISA cannot be withdrawn until age 18, even in the case of emergency.
 
Junior SIPPs
Quite understandably, one of the last thoughts for a new-born is planning for their retirement, but it provides one of the most effective ways of boosting the overall value of the pot – the junior SIPP allowance is £2,880*, which is then boosted by 20% tax relief to £3,600. That’s an instant return, before we consider the potential returns of investing that money for the long term. However, money put into a junior SIPP cannot be accessed until the child is 55, and it is legally in their name so there is no way to take it back should an emergency require you to do so. Furthermore, pension rules are constantly evolving, and it is likely that they will change again before the child reaches retirement.
 
Children’s Savings Accounts
These accounts can be a good way to help children develop good savings habits from a young age. Generally speaking, there’s no tax to pay on the interest generated in these accounts (although this does depend on the total amount and your own personal interest income). The money belongs to the child and they take control of the account when they are 16.
 
National Savings and Investments Premium Bonds
Premium bonds are backed by HM Treasury and are therefore one of the safest choices around. They provide the chance to win cash prizes ranging from £25 to £1m every month, although the current average prize rate equates to 1% a year, which is below the usual rate of inflation, meaning that the savings are losing purchasing power. The maximum investment amount is £50,000.
 
*This amount is the limit for children with no earnings, should your child earn more than this amount they are eligible to increase the pension contributions.
 
This article was taken from The Summer 2021 issue of 1875. To subscribe to our investment publications, please visit www.redmayne.co.uk/publications.
 
Please note that investments and income arising from them can fall as well as rise in value. Please note that tax treatment depends on the specific circumstances of each individual and may be subject to change in the future.
Investment and Savings Products for Children
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