Life

4 myths about children’s savings and investments everyone needs to stop believing

With a new tax year starting in April, here’s how to get to grips with saving for your child’s future.

It’s always best to start saving as early as you can
A family It’s always best to start saving as early as you can (Alamy Stock Photo)

The new tax year will start in April, and for many parents and grandparents, it’s a time to consider how best to grow a nest egg for their child’s future.

Junior Isas, or Jisas, can be a good way to start. They are long-term, tax-free savings accounts available to under-18s.

Up to £9,000 can be put into a Junior Isa in the current tax year, which ends on April 5, so if you haven’t used the annual allowance yet, it’s time to get your skates on. The annual limit for 2024/25 will remain at £9,000.

While many families don’t have anything like the full Isa allowance available to put into an account, they can still build up a sizeable nest egg for their children by putting smaller amounts away often.

According to calculations from investments and retirement savings provider Fidelity, some parents may even be able to build a £18,000 pot by the time their child turns 18 – based on making monthly contributions throughout their life of £55.50. Because of the length of time that the money is invested, savings can grow quite substantially.

Emma-Lou Montgomery, associate director, Fidelity International says: “Many parents and grandparents often aim to kickstart their children’s finances by setting money aside for their future. Our analysis shows that investing £55.50 monthly into a Junior Isa could cultivate a healthy £18,000 pot by the child’s 18th birthday.”

Piggy banks (Alamy Stock Photo)

However, the calculations are based on certain assumptions, including 5% growth in the value of the money invested per year. The assumptions also don’t take inflation into account, which could erode the real value of the savings pot.

What happens to savings pots in “real world” scenarios will vary, but generally the earlier you start saving, the longer you are giving for the value of your savings to roll up, boosting the power of your savings pot.

There are some common myths around investing for children, however, that might cause concern or leave families confused. Here, Montgomery delves into them…

Myth one: Children don’t pay tax

“Contrary to popular belief, children are liable for tax, although few are fortunate enough to earn enough on their savings and investments to actually pay any,” says Montgomery. “Just like an adult, they only start to pay tax once they earn above their personal allowance, which is currently £12,750.

“The rules are tougher though if the interest is earned on money from a parent. If your child earns more than £100 in interest in any tax year from money you have given them, then you will find that you are personally liable for tax on the interest earned if it’s above your personal allowance.”

Myth two: Children can’t have a pension

Montgomery says: “You can start saving into a Junior Sipp (self-invested personal pension) as soon as your child or grandchild is born.

A piggy bank (Alamy Stock Photo)

“Each child can have a total of £3,600 a year, or £300 a month, saved into a pension. Just as with your pension, the government automatically tops up payments by 20%, so for your child to have the maximum £3,600 a year, total contributions only need to come to £2,880.”

Myth three: Grandparents will pay tax when gifting money

“While parents who save or invest money on their children’s behalf can face a tax bill if their child’s savings or investments earn more than £100 in any tax year, the same does not apply to you when you’re a grandparent,” says Montgomery.

Myth four: Your child can’t get their hands on the money with a Jisa

“With a Jisa, a child gains control of their account when they turn 16, but can’t withdraw the funds until their 18th birthday,” Montgomery explains.

To prepare your child before they take control of their money, she suggests having conversations with them early on, “to instil good financial habits as they witness their wealth grow over the years”.

As well as growing a savings pot, there are also some simple ways you can help instil good financial habits in children from quite an early age.

This does not mean getting them bogged down in your own financial worries or concerns.

But you could talk to them about the regular outgoings that make up the family’s finances, such as your regular bills, how you budget for them and where your income that goes into the household’s financial pot comes from.

When you are going around the supermarket, it is also worth talking to children about how to stick to a budget, such as by using a shopping list and comparing prices and special offers. Not all “deals” may be as good as they initially seem.

And it is also worth talking about savings goals. If you are saving something special, perhaps discuss some short-term outgoings you’re giving up or spending less on, so that you can put the money saved towards your goal.

Perhaps this will inspire your child to set their own financial goals – and before you even know it, you will have a budding young saver on your hands.