Options for investing for children saw a change last September, when National Savings & Investments (NS&I) withdrew the fixed rate Children’s Bond from sale and launched its first, online only junior ISA (JISA). The new cash JISA is no league table topper, as it currently offers only a 2% variable interest rate compared with 3% available from some High Street names.
Interest rates for cash JISAs are generally higher than those available on adult cash ISAs, so before you decide to contribute to a cash JISA for a child or grandchild (or anyone else under 18), remember:
- Not all children are eligible for JISAs. Children born between 1 September 2002 and 2 January 2011 can only have a JISA if they do not already hold a child trust fund (CTF) account. However, this restriction can be overcome easily by transferring a CTF to a JISA.
- It is arguable that locking up an investment in a short-term deposit over the long term until a child reaches age 18 may not be the most sensible option to maximise your capital. With the current inflation rate around 3%, the purchasing power of the cash deposit is doing little more than standing still at best.
A stocks and shares ISA could have greater long-term growth potential.
- The maximum total JISA investment in 2017/18 is £4,128 and, to complicate matters further, a child can have only one cash JISA at a time (adult ISAs have different rules).
- At age 18, the JISA funds become immediately available to the new adult.
Some families may feel that making a full JISA fund available to an 18-year old is not always advisable. If you’re uncertain about how a young adult might handle their sudden windfall, there are other options. One is to contribute to a personal pension instead of a JISA. The maximum contribution is lower, at £2,880 per tax year, but:
- The contribution benefits from basic rate tax relief, even though the child will almost certainly be a non-taxpayer. So £2,880 therefore becomes £3,600
in their pension plan.
- During the investment period, the tax treatment is virtually the same as for JISAs – no UK income tax or capital gains tax.
- Once the adult child draws the benefits, 25% will be available as a tax-free lump sum, with the balance taxable as income under current rules.
- Normally the pension fund cannot be drawn upon until the ‘child’ is within ten years of their state pension age (SPA). As the SPA is steadily rising, that will probably mean access becomes available from around the age of 60.
In between the two age extremes, it is possible to use trusts to make gifts to children while still retaining some control as a trustee over when and how funds can be accessed. If you choose the trust route, there are no constraints on the size or type of investment, but the tax treatment may not be as favourable. For more information on all the options for children’s investments, do get in touch – this is an area with some tricky tax traps for the unwary.
The value of tax reliefs depends on your individual circumstances. Tax laws can change.The Financial Conduct Authority does not regulate tax and trust advice.
The value of your investment 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 longterm investment and should fit in with your overall attitude to risk and financial circumstances.