Piggy bank: Junior Isas helps to save in the long term
When it comes to saving or investing for children, there are a number of different options, depending on whether you want something fiscally efficient, but inflexible or flexible, but taxable.
You can save and invest for your children in a standard account, but there are a few somewhat bizarre tax rules on this, which are explained below.
Ultimately, this means that all savings or investment returns that are generated in excess of £ 100 per year from money from mother or father are taxed at that parent's tax rate.
Parents can save tax-free for their children up to the age of 18 via a Junior Isa that was launched in November 2011 to replace children's trust funds.
Every year they have a benefit, it's their turn £ 4,260 for the tax year 2018.
There are also savings and investment plans for children with fewer age and premium limits, but can raise income tax.
Outside a Junior Isa or CTF, the interest on most child savings is paid tax-free. But there is a big stumbling block, which means that parents and stepparents are limited how much they can tax their child.
We look at the ways in which you can save for your children, how the schedules work and give tips and guidance.
> Is your child suffering from a lost CTF windfall?
The Junior Isa
Just like a normal Isa there is an option for cash and shares and shares for the Junior version, but remember that you do not invest for yourself, but for your child that gains access to the age of 18.
The inclusion of animals is permitted until the child's 18th birthday, except in cases of illness or terminal illness.
When reaching 18, only the child (and no one else) can withdraw the money.
Most do-it-yourself investment platforms offer a Junior Isa, looking for low-cost people who fit your way of investing and who offer you all the help you need.
The rates on cash Junior Isas are better than standard savings accounts. A selection of the best is below and you can view the best savings rates of Junior Isa and children here.
|Bank / building society (min investment)||% tax free|
|Coventry BS (£ 1 +)||3.60|
|Nationwide BS (£ 1 +)||3.25|
|Tesco Bank (£ 1 +)||3.15|
|Darlington BS (£ 1 +)||3.00|
|Halifax (£ 1 +)||3.00|
|Santander (£ 1 +) (3)||3.00|
|(1) You must inform the company 45 days in advance if you wish to change this account.|
|(2) You lose 90 days interest if you leave this account.|
|(3) Preferential rate for children of 123 and Select customers.|
Do you really want a Junior Isa?
Before deciding to save in a Junior Isa or invest in CTF, parents must carefully consider the restrictions.
The money that is deposited can only be paid out when the child is 18 and when they reach that milestone age, their pot is passed on to them. Ultimately, if you do not apply parental influence to them, you can not stop doing what they want with the money when they turn 18.
An alternative to a Junior Isa is to simply save on a standard savings account for a child or to invest with a standard account for a DIY investment platform or even a specific investment plan for children. However, this has fiscal implications, as explained above.
Some financial advisors suggest that if you do not already use your own annual Isa benefit, you can reserve part of it to invest for your children, with some money or a pot that is reserved for them within your own DIY investment account.
This is a much more feasible option now that the Isa benefit is £ 20,000 a year. Keep in mind, however, that the money that is deducted from your accounts will be inherited from inheritance tax in your estate.
For many, there is sufficient reserve capacity, but for those who use much of their Isa benefit, intend to invest a significant amount for their children, or have a number of children, this can be restrictive. A couple with two children can use both a do-it-yourself investment and a child per child.
Start them early: teaching children about saving and helping them with them is the first step towards learning about money and financial life
Child Trust Funds
In the framework of the underlying trust scheme, all babies born on or after 1 September 2002 have been given a minimum £ 250 at birth and receive a similar lump sum when they reach the age of seven.
Parents with friends and family can add up to £ 4,080 each year in the tax-free fund. No account can be taken from the account until the child reaches the age of 18 – at this time he or she is free to spend the money at its discretion. You could open an account once you have received your voucher
The fund for children's funds was replaced in 2011 by Junior Isas. Parents could spend money on the child trust funds, but there would be no government support and no transfers to Junior Isas were initially allowed.
As a result of this closure, fund houses have concentrated their activities on junior Isas, which has reduced the choice of investments in and providers of CTFs.
We have successfully campaigned for the government to allow transfer of CTFs to Junior Isas and after a consultation on this topic, you can now move from your CTF to a Jisa.
Moving from a CTF to Junior Isa
You must choose a Jisa provider to go and it should take up to 15 business days to transfer to a cash account and 30 days for non-cash accounts.
You must transfer the full amount of your CTF before you close it. The provider can not refuse.
However, the Junior Isa provider can refuse the money.
Five steps to move your child restrust fund
1. Check the value of the child trust fund and whether there will be a loss of guarantees or excessive transfer costs
2. Select the Junior Isa provider to go
3. Complete the application form / CTF transfer form of the Junior Isa provider and return to the Junior Isa provider
4. The Junior Isa provider opens the account and sends the transfer request to the CTF provider
5. After the transfer of the savings from the CTF to the Junior Isa, the Child Trust Fund has been closed
The Junior Isa provider performs the anti-money laundering checks electronically and may request additional evidence after the application.
Transfers may not last more than 30 days. In most cases, CTF savings are transferred as cash.
The bizarre tax treatment of savings for children
Children can earn money with savings and dividends from shares and in theory if they remain under personal deductions of £ 11,850, they pay no tax.
However, there is a catch. Children can earn up to £ 100 interest or dividends per year tax-free from money that their parents or step-parents have gifted.
If it generates higher income, tax is levied on the parent who has donated the tax rate of the money.
The parent's savings allowance, of £ 1,000 for taxpayers with basic rate and £ 500 for taxpayers with a higher rate, can be used to cover this, but if they have used that, tax will be charged to them according to their tax rate.
The idea here is to prevent parents from blessing money in children's bills, but with a £ 20,000 annual Isa benefit, £ 1,000 savings and £ 2,000 dividend allowance, this seems an even more bizarre anachronism than before.
Money given by grandparents and other adults is not covered by this limit.
If you want to invest or save outside of a Isa for children, investment companies, banks and mortgage banks also offer investment and savings plans for children.
These products use the personal tax deduction of a child as an amount that they can earn a year before they are taxed.
Parents must complete an R85 form – available at each bank – for each open child account so that no tax is paid on savings. If tax has been paid in error, use an R40 form to recover.
For an investment in the longer term you can put money in one investment plan for children.
Aberdeen offers the choice of 16 investment funds and you can enter a fixed amount of at least £ 150 per trust or £ 30 per month per trust.
Baillie Gifford offers a series of eight investment funds. You can invest a lump sum of £ 100 or earn monthly contributions of £ 25.
Both have annual management costs and you will have to pay stamp duty on share purchases.
Where to invest for children
Investing for children is a long-term game, so you can afford to take more risks than you would with your own money, but you have to make sure that you do not put all their eggs in one basket.
A global fund invested in equities worldwide is a good core element for a portfolio.
A tracker or index fund will follow the global index, while an active fund will try to select the best companies, which could increase your return, but also the chance that the manager could do it wrong or get rid of their style .
These are ideas, not recommendations – always do research yourself:
Fidelity Index World Fund P
This follows the companies that are part of the MSCI World Index of developed markets. Of costs: 0.12%
HSBC FTSE All World Index Fund C
This follows a global index that also includes an element from the emerging markets. From costs: 0.16%
iShares MSCI ACWI ETF
This follows an index that consists of companies in both developed and emerging markets. It is an ETF, so you pay to buy and sell. List of running costs: 0.6%
Lindsell Train Global Equity
This fund buys and holds what the respected managers Michael Lindsell and Nick Train see as the world's best companies. 0.74%
The Terry Smith fund invests in companies in the world that, according to him, have a lasting advantage. The performance was good, but it was heavily weighted to the US. List of running costs: 0.97%
Witan investment fund
This investment fund focuses on long-term growth and invests with various fund managers around the world. One third of that is in British shares. From costs: 0.86%
Another option for long-term investment can be found in some of the cheapest investment funds. Managers choose shares here but offer investments with low costs.
For example, the strong share of the city of London costs 0.42 percent, the Scottish mortgage with global growth costs 0.37 percent and the bargain hunter Temple Bar charges 0.49 percent. They have all delivered consistent market and sector specific performance over the medium to long term.