As students head to university this autumn, you might be wondering about the financial provisions you’ve made for your child or grandchild.
Financially supporting a loved one through higher education is a great way to ensure they can focus their attention where it is needed most. Without the obstacle of money worries or the need to balance a part-time job, they’ll have the best chance to shine.
Financial help requires careful planning so it’s best to start early. It’s also vitally important to keep track of the money you save.
More than £1.7 billion is currently sitting in dormant Child Trust Funds
A recent report by FTAdviser confirms that almost a million young people born between September 2002 and January 2011 could be owed money from Child Trust Funds set up on their behalf.
HMRC confirmed back in July that the money is likely to have been forgotten, leading to concerns that it might never be claimed.
Child Trust Funds were a government initiative funded through £2 billion of investment, designed to provide tax-free savings for young people when they reached 18. Latest figures suggest that around 42% of 18- to 20-year-olds have failed to claim the savings due to them, with an average value of around £1,900 each.
These figures are particularly worrying as around 887,000 Child Trust Funds were opened for children from low-income families.
If you have a child or grandchild born between September 2002 and January 2011, be sure to check your paperwork. Money could be sat in a Child Trust Fund waiting for them.
Junior ISAs arrived in 2011 to replace Child Trust Funds
If your child or grandchild was born too late to have a Child Trust Fund, you might consider setting up a Junior ISA (JISA) on their behalf.
These are an incredibly tax-efficient way to save or invest for your loved one’s future. You can put aside up to £9,000 during the 2023/34 tax year, but you can’t carry over any unused allowance so considering using it all if you can afford to.
The money in the fund belongs to the JISA holder (your child or grandchild) but you can manage the account until they turn 16. At this point, control passes to the child but they can’t withdraw funds until they reach age 18.
While accessing their money at 18 means it will arrive just in time for higher education, you might find that your loved one has other ideas.
A solid financial education should help to give you confidence that the money will be used sensibly, but ultimately, the decision will be out of your hands.
There are two main types of JISA.
1. Cash JISA
As a parent or guardian, you can take out a Cash JISA on behalf of a child under the age of 18 who lives in the UK.
Unlike a regular cash savings account, there’ll be no tax to pay on interest earned.
While savings rates have been improving in the last 18 months, This is Money confirms that the best Cash JISA rate (as of 21 September 2023) is 4.75%.
This is lower than the UK Consumer Prices Index (CPI), which according to the Office for National Statistics (ONS) currently stands at 6.7%. The Bank of England (BoE) expects inflation to fall over the next year and it should reach its own 2% target sometime between April and June 2025.
In the meantime, though, with inflation higher than your Cash JISA interest rate, your child’s money is effectively losing value in real terms.
2. Stocks and Shares JISA
With a Stocks and Shares JISA, the money you put aside for your loved one is invested in the stock market.
As with the Cash JISA, a Stocks and Shares JISA can be opened on behalf of a UK-resident under the age of 18.
There is usually no Capital Gains Tax (CGT) to pay on money made and withdrawals are also free of Income Tax.
The added risk of investment comes with the potential for greater returns, especially over the long term. Taking out a Stocks and Shares JISA when a child is born allows for 18 years of investment returns and compound growth, which could give them a huge financial boost at an important life milestone.
Get in touch
JISAs are a tax-efficient way to give your loved ones a financially stable start in life, but you’ll need to think carefully about the type you choose. You’ll also need to be comfortable ceding control to your child or grandchild when they turn 18.
If you’d like to discuss building a nest egg for a young person, a potentially “lost” Child Trust Fund, or you have any questions about your own long-term financial plans, get in touch now. Please email hello@globeifa.co.uk or call us on 020 8891 0711 to discuss how Globe IFA’s expert financial advisors can help you.
Please note
The value of your investments (and any income from them) 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. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
