When you have children, budgeting becomes ever-important, and the global pandemic has only forced people to tighten their purse strings all the more. Loughborough University’s Centre for Research in Social Policy has assessed the cost for couples of raising a child from birth to the age of 18 to be just over £150,000, with the cost for a single parent being in excess of £180,000.1
Parents face a myriad of financial challenges, meaning that putting pennies aside for their children’s future might not feature high on the list of priorities. But if it’s important to you that your child has a fighting chance of saving for a prospective goal, the earlier you begin saving, the better.
There are many advantages to playing the long game when it comes to investing, as has been proven time and time again. And what it comes down to is really very simple – the longer an investment has to potentially grow, the greater the benefit will be from the year-on-year compound effect of reinvested returns.
Compound interest is one of the most important principles to understand in effectively managing your finances.
Ways and means
Parents and grandparents who wish to save money for younger members of the family have several options at their disposal. The most popular is the Junior ISA (JISA) – an ideal way to set aside money for a future house deposit or university fees, for example. Only a parent or legal guardian can open a JISA, but anyone can then pay into it on the child’s behalf.
Did you know that children can have a pension fund as soon as they are born? Setting one up can even bring meaningful tax advantages! If your child is a non-taxpayer, they will nevertheless receive basic-rate tax relief on contributions, meaning a maximum of £2,880 a year is automatically grossed up to account for tax at 25%, producing an annual investment of £3,600.
What’s more, younger investors have time to play with, and so you may think it’s worth taking on more risk when it comes to their pension investments. It’s not uncommon for younger investors to be fully invested into equity funds.
The key to success
Rob Gardner, Investment Director at St. James’s Place, says that starting early and saving regularly can have an extraordinary impact.
“It’s all about compound interest – it is the key to growing wealth. Albert Einstein called compound interest the eighth wonder of the world and said: ‘Those who understand it, earn it, those who don’t, pay it.’ The secret is to start saving into a pension as early as possible, even with relatively small amounts, to take advantage of it.”
Just as with adult pension pots, those for children have the opportunity to grow in a tax-advantaged environment. And, much like a JISA, anyone can contribute to the pension, be it parents, grandparents, godparents, friends or other family members. Just be mindful of the fact that they can only be set up by parents or guardians.
This savings method may also help mitigate an Inheritance Tax (IHT) liability. The reason for this is that payments from grandparents, for example, may be covered by the annual £3,000 IHT gifting allowance, or the exemption for payments made out of income.
Education, education, education
Current legislation states that savers can access their pension fund from the age of 55 – yet there are benefits to be had much earlier than that.
Saving into your child’s pension will mean they won’t feel as pressured to start thinking about their retirement when they’re embarking on their careers, weighing up the costs of starting a family or buying their first home. What’s more, it could help to teach them about tax relief and the value of saving.
Gardner, who is also the Co-founder of RedSTART, a charity that seeks to improve financial education focused on primary school education, really champions this idea:
“Educating the next generation in financial literacy is not a ‘nice to have’ – it’s the best investment you can make to secure their financial future. Children learn their money-saving habits very early in life, yet young children rarely receive lessons on budgeting and money management. So, helping a child to fund their own pension could be one way to help them understand concepts such as compound interest.”
There is widespread agreement that managing finances should feature more prominently in early-years education. On the other hand, many people see it as the parents’ responsibility to teach their children the true value of money.
Starting a JISA or pension for your child might just encourage them to adopt good saving habits for life, and so what better gift is there? Invest in your child’s financial future today, and reach out to the experts at Wellesley – we believe in a rosy future for everyone.
1 Loughborough University’s Centre for Research in Social Policy, 2018
The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.
The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.