Saving for junior

Saving for junior

Sending a child to school for the first time is a significant milestone in many ways and, if truth be told, one of those ways is financial.  Even though childcare costs may still be an issue, especially in the school holidays, the fact still remains that school provides a place to keep children safe while parents get on with work (or anything else they do) as well as an education.  

When children reach school-leaving age, they are classed as young adults and while they may, in principle, be able to fend for themselves.  In practice, however, there are good reasons why they might still benefit from parental help regardless of whether or not they plan to go on to university.  For example, driving lessons and their own transport might help to open up job opportunities for them.  That being so, parents may wish to put away some money while their children are at school in order to help them transition into young adulthood when they turn 18 (or 16).

Junior ISAs are a tax efficient option for saving for children

Junior ISAs are essentially restricted versions of the standard adult ISA.  For the 2018/2019 tax year, the maximum payment is £4,260, which may not sound like much compared the adult £20,000 but is still a lot better than nothing.  Like standard adult ISAs, the money can be held as cash (in which case interest income is tax free) or it can be invested in stocks and shares (in which case capital gains and dividend income are tax free).  An adult control the account until the child is 16, at which point they can take over the management of the ISA but can only withdraw the money when they turn 18.

Cash versus stocks and shares

Deciding how much of the money to keep in cash and how much to invest could be a challenge for some parents and professional advice could be very helpful here.  While cash is, on the face of it, the safest option, in that the capital is guaranteed to be preserved, interest income alone may not be enough to ensure that your (child’s) savings grow in line with inflation, not even when protected from taxation.  While investing in the stock market may seem riskier, it also offers the potential for much higher returns, which could really make a difference to your child’s future as a young adult.

The question of control

Speaking of risk, there is one issue with Junior ISAs, which some parents may find off putting.  That is the fact that as soon as your child reaches their 18th birthday, they get full control over the money, whether you like it or not, and they can spend it exactly as they see fit.  In other words, you might have intended them to use it the money to further their education, but if they want to spend it on the latest tech gadgets, there is absolutely nothing you can do about it.  There are basically two ways you can look at this possibility.  One is to take the view that if you educate your child about good financial management while they are still young, then you will have equipped them to handle the money responsibly and if they choose not to do so, you can legitimately decline to give them further finance or insist that the money is given as a loan and paid back.  The other is to avoid Junior ISAs and opt for a savings method which may be less tax efficient but gives you the option of exercising (some degree of) control over how the money is spent.

The value of investments and the income they produce can fall as well as rise. You may get back less than you invested.

Tax treatment varies according to individual circumstances and is subject to change.

If you have any questions please contact your local Charles Derby Financial Adviser today on 0800 849 1279 or email This email address is being protected from spambots. You need JavaScript enabled to view it.