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Saving for the next generation

It's never too early to start saving for your children / grandchildren's future. No matter what your income level is, there are ways you can help ensure that your loved ones have a solid financial future. Discover our top tips on how to save for the next generation.

We all want the best for our children. Being able to provide your child’s future with a lump sum at 18 or pay towards tertiary education or a car provides them with an extra boost at a vital time in their lives. Saving regularly while they are young will enable the pot to grow as they grow. That said, it isn’t always prudent to hand a large sum to a recently emancipated teenager.

How should I save money for my child?

With options such as bank savings accounts or building society savings accounts, a junior ISA, property and gold, how should you build a brighter future for your dependents?

Children’s Savings account

Child savings accounts can be opened at any high street bank, and anyone can deposit regularly or ad hoc into them. Some may require an opening balance and depending on the type of account, there may be restrictions on withdrawal (often the best interest rates come with strings attached). The important consideration for a child savings account is the tax on interest.

Tax on Child Savings

As a child, if you earn more than £100 in interest from your parents’ money, the government will tax that money as if it was the parents’ money. It would actually be considered a part of the parent’s Personal Savings Allowance. However, if a grandparent or another generous relative or friend saves into a child’s account, that money will not be taxed.

A child is not in direct control of their savings account. Instead, it is managed by an adult custodian, which can be the parent or equally a relative or friend. When the child turns 16 the account is converted into an adult account and they become custodians of their own money.

Do you have to declare children’s savings?

No, you do not have to declare savings for your children. However, if the interest earned is more than £100 in a tax year, it will be taxed as if it were the parents’ money. The best way to avoid this is to open a Junior ISA for your child, as the interest earned is tax-free.

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Saving for Children in a Child ISA

The UK’s tax-efficient savings vehicle is available to children of any age, albeit with a lower deposit threshold than an adult account. The junior ISA allowance is currently £9,000, whereas adults can save up to £20,000 a year tax-free. The important point about ISAs is that the interest earned is tax-free so the £100 rule doesn’t apply. Unlike an easy access savings account, the junior ISA deposits can’t be withdrawn until the child turns 18 and takes control of their money.

Like adult ISAs, Junior ISAs can be held as a cash ISA with a set or variable interest rate, or they can be invested in stocks and shares and suffer the vagaries (positive or negative) of the stock market. While junior ISAs are a good way to utilise the tax advantages they offer, if parents of relatives have more than £9,000 a year to invest for their child, they’ll have to find alternatives.

Child Trust Fund

Before the advent of the junior ISA, parents could invest in their children’s future with a child trust fund which was similarly interest tax-free. The UK government provided an initial starter investment for children born between 2002 and 2011 and these can be added to in the same way as a junior ISA until the child turns 18. The same deposit limit applies though.

Trusts and property

Parents can set up a trust for their child but it will be subject to the same tax obligations as any other legal trust. Trusts are not necessarily an effective method of tax mitigation, and unless there is a specific reason for the trust, for example, to control the investments for a family member with specific needs, saving in a Child Trust Fund may not be the best option.

It is possible to hold property in a trust for a child under 18, as they cannot legally own a property outright. That said, depending on individual circumstances the income from a property in trust for a child may fall within the £100 rule.

Buying Gold As A Transferable Investment

Precious metals are an important part of any diversified investment portfolio, and this holds true when considering long-term savings for children. There are several advantages to buying gold in order to pass it on to your child at an appropriate time. Firstly, there are no restrictions on the amount you can invest, from a single coin to a regular investment that builds up over time, the £9,000 rule does not apply.

In addition, physical gold that is securely stored lowers the counterparty risk inherent in any financial institution. Bank savings are only guaranteed up to a certain amount, and the financial crisis showed that even large institutions can fail in certain circumstances.

Parents, legal guardians or family members retain full control of their gold until they want to pass it on, and there are tax relief advantages as well. Depending on individual circumstances, certain forms of the precious metal are capital gains tax-free (coins minted by the Royal Mint) and investment-grade gold is also VAT free.

Physical Gold for Long term growth

With interest rates still so low, bank savings are not even keeping up with inflationary pressure. While gold doesn’t earn interest, it does have a venerable history of long-term value growth. Investing in gold when a child is young allows you to hold onto the investment for a period that will allow it to grow over time. Despite fluctuations in the gold price, the longer-term trend has been very positive and regular saving will build up an accumulation of wealth which will grow alongside the gold price.

For example, investing £350 a month in a gold accumulator account over ten years would build up a basic £42,000 in savings, but the long-term growth trajectory for gold will lift this figure, potentially substantially. Many analysts and gold experts expect gold to rise above $10,000 in the next ten years, but even at a more modest projection of $5,000 by 2032, growth in a gold accumulator would mean an investment worth well over £100,000.

Saving regularly while your children are young will give the investment time to grow, and allow them to start their independent life with little more securely.

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