We all have dreams for our children’s future. We want them to experience every opportunity possible, give them a good education, enable them to travel and give them a helping hand onto the property ladder.
How best to provide for your children is a question Parental Choice put to Peter Green, Chief Executive of one of the country’s leading friendly societies specialising in children’s savings and the parent of two teenage children.
Peter explained, ‘This year both of my children are at University. Amy is in her final year of a film production degree in Manchester and Jacob’s in his first year training to be a primary school teacher. That means I have to find the rent on a student flat in Manchester and the rent on a room in halls of residence in Ormskirk. ‘
For parents on a modest income the maximum maintenance loan available via the student loan company (around £75 per week during term time) won’t pay the rent (around £100 per week if you’re lucky, plus half rent over summer even when they’re not living there). When you add in bills, food, transport, equipment and the occasional night out, parental subsidy or a part time job is the only solution.
Peter added ‘my advice to all parents is to start saving now so that you can help your children be successful. A part time job was simply not an option for Amy, who has to take unpaid work experience whenever she can, or for Jacob who will spend 12 weeks of every year on placements in different parts of the country. Without parental help they would have really struggled.’
With lots of different ways to save for your children it can be confusing. We asked Peter to explain the various options.
The obvious starting point is a bank or building society deposit account, however Peter expressed caution. A simple deposit account is a great way of teaching children how accounts work by encouraging them to save for a treat or keep their birthday money safe until they are ready to spend it. However with interest rates lower than inflation and a potential tax liability for parents on any interest earned over £100, it’s not the best place for longer term saving.
All children who don’t have a Child Trust Fund can invest in a Junior ISA. The main advantage is that, just like adult ISAs, they are tax free.
There are bank and building society cash deposit Junior ISAs and stocks and shares based Junior ISAs. Children can have 1 cash and 1 stocks and shares based Junior ISA; you can’t open new accounts with different providers every year like you can with your ISA, although you can transfer them to different providers when opened. They must be opened by parents or legal guardians, however when open anyone can pay into them.
Currently you are only allowed to invest £4000 per year in a Junior ISA, however this limit may increase in future years.
With interest rates remaining at a record low you are likely to get a better a return on a stock market based investment, however there is a risk that the value of the investment can fall. There is an alternative. A With-profits Junior ISA offered by life insurance companies and friendly societies give you exposure to the stock market whilst many of them guarantee the value of your investment when it matures.
The big disadvantage of Junior ISAs and Child Trust Funds is that, as soon as the child reaches the age of 18 the money is theirs. If you want to save for your child’s 21st or to help them onto the property ladder the Junior ISA might not be the best solution.
If you have older children they might have a Child Trust Fund, which were provided by the government to all children born in the UK between 1st September 2002 and 3rd January 2011. The government have made a commitment to allow monies invested in Child Trust Funds to be transferred to Junior ISAs however the details of when and how this can happen are still to be worked out by HMRC. There is a need for caution and leaving the money invested in a Child Trust Fund might be the best for your child. The majority of Child Trust Funds are stakeholder products, which means that the investment has to meet tough government standards which may not apply to the Junior ISA you transfer it to.
For many parents the best way to save for their children is by making a commitment to save a relatively small amount on a regular basis. Whilst deposit accounts and Junior ISAs are flexible the discipline of regular monthly saving can make a huge difference to the opportunities your child might have.
Tax Exempt Savings Plans, which are only available from friendly societies, are a great way of building a cash sum for your children. They enable you and every member of your family to save up to £25 per month on a regular basis. As plans can be taken in both parents, children’s and grandparents names a significant amount, paid out tax free, can be built up for your children. Peter explained ‘there are two main advantages to Tax Exempt Savings Plans. The discipline of regular saving and the opportunity to choose at the start of the plan at what age you want your child to receive the cash sum you have saved for them. I, like many parents felt that 18 was too young, I’m saving for their 21st.’
The TwentyOne21 savings plan from Healthy Investment allows you to save a modest amount every month to give your children a gift of real value when they turn 21.
With thanks to Peter Green, Healthy Investment