Today’s Gen Alphas are likely to live 100 years or more. An early start on savings can give them the financial foundations to fund it, says Samantha Laurie...
You’ve spoilt them with Christmas presents, but is it time to think about something more lasting – a gift that could set them up for the future?
Whether it’s helping with uni fees, a deposit for a first home or pension pot funding, there are plenty of options out there.
You don’t have to be a financial whizz to get started, but a few pointers from the experts can’t hurt, so here’s what James Martin of Trowlock Wealth Management in Esher and Max Cook of HJP Chartered Financial Planners in Dorking have to say...
Junior ISAs (JISAs)
For those under 18s, this is a simple tax-efficient way of putting money aside up to £9,000 a year in cash or stocks and shares ISAs. The only downside is that at age 18, the child can access the money and spend it as they like.
MAX: “History tells us you get much better growth in stocks and shares ISAs. If you invest in a newborn, you have 18 years to ride out the volatility.”
JAMES: “You can set up an investment trust as a feeder for the JISA. For example, if you put in 10 years of allowance, that will grow. Each year, it dripfeeds the Jisa, but the pot is also increasing, and you’re aiming to equalise it.”
Junior Pensions
Anyone – even a child – can pay into a pension and receive the same 20% tax relief afforded to adults. You can pay £2,880 a year, which the government will round up to £3,600. A child’s pension must be set up by a parent or guardian, but anyone can contribute. It’s a long-term investment, with money locked away for decades, but that means it has huge potential for growth.
MAX: “If you pay £2,880 into a child’s pension from newborn to 18, by the time they reach retirement age, it could equate to a pot of over £1 million.”
JAMES: “Early pension funding can make an enormous difference. Most people don’t start pension funding until their 20s, so this can give you 20 extra years of growth. You’ll want to look for a higher equity plan, as you have time to ride out the peaks and troughs.
Trusts
Ideal for making regular contributions: you can put in as much as you like and take it out when needed. There are many different variations, such as a bare trust which invests in stocks and shares on the child’s behalf and is taxed as belonging to the child – which, in most cases, means tax-free. Generally, the money leaves the grandparents’ estate for inheritance purposes, but it’s important to ensure they are set up properly.
JAMES: “It’s best to take advice as these can be expensive to set up and there are tax ramifications if not done correctly”
Gifts
Everyone can gift up to £3,000 a year to one person – or split between many – without inheritance tax implications. There are also small gift allowances of £250pp to anyone not receiving other gifts from you. Furthermore, if your yearly income exceeds your expenditure, you can make regular gifts out of that surplus to whomever you like.
MAX: “It’s important to document regular gifting – you can download a spreadsheet online.”
NS&I Premium Bonds
Essentially, it is a savings account that pays out its interest as a monthly prize draw. You can put in up to £50,000, and there’s a one in 21,000 chance of winning the £1m jackpot, with many small wins too. Of course, you might win nothing – ever. From a financial point of view, there are much better options, say, James and Max, but savings are iron-clad, and you can take your money out at any time. Furthermore, because it’s classed as proceeds of gambling, winnings are tax-free.
Savings Accounts
MAX: “Rarely the best way to save over five years or more, but they do help create good savings habits. Grandparents can do it in their own name or the child’s and there are some high interest rates still available for smaller savings locked away for a year.”
Lifetime ISAs
Designed to help young people save for either a first home or retirement, this works as a tax-free wrapper around savings (up to £4,000 a year), with the government topping it up by 25% to £5,000. It can only be taken out by 18-39 year olds.
JAMES: “The ISA can only be used for first-time homes of up to £450,000, which many feel is too restrictive in some areas of the country.”
- James Martin, Trowlock Wealth Management, Esher; trowlockwm.co.uk
- Max Cook of HJP Chartered Financial Planners, Dorking; hjpcfp.com
