November 2021

Why it’s important to invest money for your children, as well as save

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It’s perfectly normal to want to be able to provide your children, grandchildren, or any other dependents you have with money for their futures.

As a result, many parents and grandparents open savings accounts for the children in their lives to create a pot for their adulthoods.

In fact, according to NatWest statistics published by the Independent, 76% of parents and guardians have started saving or investing for a child under the age of 18.

However, the NatWest research also uncovered a slightly less encouraging statistic – that of those parents and guardians saving and investing for their children’s future, 83% of them are doing so exclusively in cash savings.

Of course, saving for your children can be an effective and safe way to give your child access to money in later life.

But the problem is that saving exclusively in cash might not be the best way of generating long-term returns. By not investing money for a child, you could be unknowingly allowing potential investment returns to disappear. This boost to your child’s money could make all the difference to them in later life.

To make matters worse, the impact of inflation could slowly erode the value of your child’s savings, meaning what they ultimately receive in adult life is worth less than what you actually intended them to have.

That’s why it’s important to consider investing money for your children or grandchildren alongside any savings you build up for them.

Eroding impact of inflation on wealth

Inflation has been a big talking point over the past few months, particularly in the context of the impact it can have on savings.

This is because if your savings receive less in interest than the rate of inflation, your money loses value in real terms.

For example, according to Moneyfacts, the highest interest rate you could expect on an easy-access savings account as of November 2021 was 0.6%.

That means in one year, a £1,000 pot of savings for your child would grow to be worth £1,006.

But the most recently recorded rate of inflation in September 2021 by the Office for National Statistics was 2.9%. So, if that rate lasted for a full 12 months, goods and services that cost £1,000 in the previous year would cost £1,029 in the next.

That means the money you saved in that easy-access savings account would have £23 less spending power in real terms.

Crucially, the impact of inflation becomes even greater over longer periods. So, if you were planning to save until your child became an adult on their 18th birthday, you might be even more exposed to the risks of inflation.

According to the Bank of England’s inflation calculator, inflation averaged 2.9% a year during the 18 years from 2002 to 2020.

Using this calculator, goods and services costing £1,000 in 2002 cost more than £1,600 in 2020.

That means your money would have needed to receive more than £600 in interest, just to keep up with the rate of inflation.

Investing for your child or grandchild

As a result of inflation, it’s important to think about investing as well as saving for your child, to give the money you put aside the best chance of achieving positive returns.

If you want to invest for a child in your life, two popular options are to do so via a Junior ISA (JISA) or a pension.

  1. Investing in a JISA

The first option you could consider is investing in a Stocks and Shares JISA, in which you can choose investments for your child’s money.

Just like an adult ISA, you can invest in a JISA without having to worry about Income Tax or Capital Gains Tax (CGT).

JISAs have an annual subscription limit of £9,000 each tax year, which is separate to your adult limit of £20,000.

You can even split this £9,000 between a Stocks and Shares JISA and a Cash JISA, meaning you can also keep some money away from the stock market in savings while still protecting it from Income Tax and CGT.

  1. Starting a pension for your child

Alternatively, you could consider starting a pension for your child.

As most children don’t have earnings, they have a gross annual contribution limit of £3,600 into their pension. That means you’d only have to contribute £2,880 to make the most of this allowance when you include the 20% tax relief that’s added to those contributions.

According to calculations by Unbiased, if you made the maximum £2,880 contribution every year until your child turned 18 then, assuming average investment growth of 4% a year, that pot would be worth around £95,000 by their 18th birthday.

In fact, even if they made no more contributions into the pot and that same assumed average growth of 4% a year continued, the pot could be worth more than £620,000 by the time your child reaches age 65.

When adjusted for inflation, that pot would have roughly the same spending power as £200,000 does now. This could help to set a base for your child or grandchild’s retirement, allowing them to make the most of the money you wanted to set aside for them.

Work with us

If you’d like to find the best strategies for saving and investing for the children in your life, then please get in touch with us at Holborn Financial.

Email info@holbornfinancial.com or call 020 8946 8186 to find out more about how we could help you.

Please note

A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation, which are subject to change in the future.

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.