Updated 25 July 2017
Britain’s children are losing out when it comes to tax-efficient saving. As part of TaxAction 2016 in partnership with Prudential, we explore the opportunities that are being missed, and reveal the single biggest advantage that children have over adults when it comes to long-term saving.
At what age should children start saving? In their teens? As soon as they’re old enough to understand? Or should they even bother in these days of low interest rates? The latest findings from the TaxAction 2016 research by Unbiased and Prudential reveals that over 7 million under-18s fall into the last category: they have no tax-efficient savings accounts at all.
Following the introduction of the personal savings allowance, which allows basic-rate taxpayers to earn £1,000 of interest tax-free, there seems to be even less incentive for people to take out cash ISAs. Junior ISAs (JISAs) have been available since 2011, but to date only 365,000 have been opened, as compared to 6.3 million Child Trust Funds (CTFs), the previous tax-efficient savings option for under-18s. TaxAction research reveals that if JISAs were to see the same level of uptake and savings activity as CTFs, then an additional 1.4million under-18 year olds would be saving a total of £422million annually – earning £11 million of tax-free interest.
Here are some more good reasons why saving for children doesn’t deserve to go out of fashion.
Motivation (aka the ‘carrot of cash’)
Parents have traditionally tried to chivvy their kids along to do schoolwork or chores by offering cash rewards, with mixed results. Rather than offering a single big reward for passing their exams (for example), you may find it more effective to link their savings to their work. Banking apps make it easy to make regular small deposits to a child’s account, as a kind of wage for doing school work. This differs in important ways from a single big prize: firstly, it rewards not an achievement but an activity, so your child can see a clear correlation between the effort they put in and what they get back. Secondly, the savings account is a neat parallel with what’s going on in your child’s brain when they study. As their savings build up, they can see the parallels in their own growing academic confidence, and the regular ‘buzz’ of regular small rewards helps their work become a positive activity.
Training (learning to save as well as earn)
A school will teach your children maths, but not very much about the practicalities of money. Many people pass into adulthood without ever developing financial responsibility, because they’ve never been taught it through experience. A study-to-save reward system at home can train children in the most effective way of all, and can reduce the risk of your children getting into financial trouble later in life. Over the years they can learn the process of work-earn-save-spend by practising it in a safe environment – rather than discovering it the hard way when they are out on their own.
The growing-up fund
A common worry among parents is that they’ll put savings away for their child, only to have the child blow the whole fund on partying or, worse, a motorbike. For this reason, some prefer to set up savings for their children’s needs while retaining control over how this money is spent. For example, you might specify that it must be used for tuition fees or university living expenses, or as part of a deposit on a place of their own. If you don’t trust your child to spend their JISA sensibly, talk to your adviser about other tax-efficient options.
Young risk-takers? Using your child’s biggest advantage
One of the big guns of children’s savings, the stocks & shares JISA, is too often overlooked. The cash JISA remains twice as popular, perhaps because parents still perceive stocks & shares as being more ‘risky’.
Of course, this is true: stocks & shares are higher risk investments. However, in investment terms ‘higher risk’ also means a greater potential for growth. Generally these types of investments are suitable for people looking for longer-term growth, such as people saving for retirement… or children growing up.
How much risk one can take (as an adult) generally depends on how much one can afford to lose and still maintain one’s lifestyle. In this respect, children are in an enviable position: they are fed and housed by their parents, so have a very high risk tolerance by adult standards. If your child’s savings are intended to be left untouched until they turn 18, then some short-term volatility is an acceptable risk if it means potentially bigger returns.
A stocks & shares JISA lets you hold equities in a child’s name, with the growth and dividends all free of tax regardless of the child’s other income. It is best to open one as early as possible in your child’s life, so they can make full use of their greatest asset – time – to achieve maximum growth through compounding by the time they draw the money out at age 18.
Taking TaxAction for your children
‘It’s crucial to establish long-term savings plans for your children as far as you can afford to do so,’ says Karen Barrett, chief executive of Unbiased. ‘It might not look like a good use of funds now, but with the lack of certainty for today’s youth, we owe it to them to plan ahead.’
Speaking for Prudential, Unbiased’s partner in TaxAction 2016, tax specialist Les Cameron agrees: ‘Saving for children in a climate of low interest and market volatility can be a challenging prospect, whether the long-term saving is for funding school fees, university fees or simply give the young person a start in life. An independent adviser can ensure that the investment is set up tax efficiently and provide guidance on the use of trusts where necessary.’
You can find an adviser to help you with saving for your children using our smart postcode search.
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