Whatever hopes and dreams you have for your children or grandchildren, it’s reassuring to know that you can help make this happen by setting them on the path to financial security when they are young. To fund the future you want for them, it’s crucial to start saving early.
Building wealth for your children or grandchildren
Junior individual saving account (JISA)
Junior ISAs share the same set of rules as adult ISAs, though with a lower annual limit on contributions, currently £9,000 (2020/21 tax year).
This means they’re a tax-efficient way to save in your child’s name. The money cannot be withdrawn before the child’s 18th birthday, so cannot be used for certain expenses, such as school fees. The child will take control of the money, and can make their own investment choices, from the age of 16.
As with a Junior ISA, a child can withdraw money from a bare trust in their name once they turn 18. However, withdrawals can also be made for the benefit of the child before this age. So, it can be used for school fees, for example.
A second difference is that there is no limit on how much can be paid in. While it is not protected from tax (as a Junior ISA is), it will be taxed as if it belongs to the child, so will often fall within their personal allowances.
Discretionary trusts offer more control and flexibility to the trustee. It is possible to establish one in the name of a group of beneficiaries (named or unnamed), for example, all your grandchildren. The trustee retains control over the money and investment choices and sets the payment terms.
However, the tax treatment is more complex than for bare trusts, usually resulting in higher taxes and more administration.
Junior self-invested personal pension (SIPP)
Junior SIPPs operate according to the same rules as other pensions, except that they have a lower £3,600 annual limit on contributions (2020/21 tax year).
This means that, like other pensions, tax relief is added to contributions, and no tax is paid on income and capital gains. It also means that, currently, withdrawals are not possible until the child reaches age 55. So, while they offer very little flexibility, there is potential for even small investments to grow significantly.
If you have any questions about this article get in touch via our contact form, or if you would like to speak directly to one of our advisors please don’t hesitate to contact Cornerstone Partner and Chartered Financial Planner, Scott Sneddon.