Nest egg: How best to save for your children’s future

As GCSE results come out today, and the dust settles on last week’s A-Level results, many parents will be thinking about how they can help their children through university. But while Fidelity calculations suggest that education is the costliest part of raising a child from birth to 21, at an estimated £71,780 in total, many will also be planning how to build up a nest egg to give their children a head-start in life. Whether you want to help with a deposit for a house, to pay for a wedding, or even build up a pension for your offspring, there are many options to consider.

 

It’s pretty obvious that the longer you save, the bigger the difference in the long run, given the beauty of compounding. Maike Currie of Fidelity stresses the importance of a little and often approach. Assuming 5 per cent annual growth, a 1.5 per cent annual management charge, and that you invest through a tax-efficient Junior Isa (Jisa), just £50 a month saved for your child from birth could become £14,735 by the time they turn 18. That said, it’s never too late: Chelsea Financial Services says investing £850 a month in funds means you can still achieve a pot of £60,000 in five years.

 

But make sure you’ve also set realistic financial goals, says Currie. If you’ve got a longer time horizon, “your children may be able to afford to take more risk with their investments than you can,” she says, advising against leaving money languishing in cash.

 

Tax benefits, however, should be another consideration. The Jisa cited earlier is a tax-efficient vehicle for saving. Money can’t be withdrawn until your child is 18, but you can invest up to £4,000 a year on top of your own annual Isa allowance. When your child reaches 18, the Jisa becomes their property, however. If this is a worry – scenes of raucous holidaying may spring to mind – a designated account may be a better option, where ownership stays with you. The downside is that the account holder is still liable for income and capital gains tax. It’s also worth remembering that, when your child turns 16, they can exploit a quirk of the Isa system. They can, for two years, hold a Jisa and an adult Isa at the same time. With the new Isa limit at £15,000, they could put up to £38,000 out of the taxman’s reach over those years.

 

You might want to think even further ahead as part of a savings plan for your child. In fact, you may even want to give them a child pension. Tilney Bestinvest research shows that if you pay £2,880 a year into a pension for your child, which will be topped up by the government paying in an extra £720, that’ll mean a pot of £64,800 by the time they reach 18. As Tilney Bestinvest’s Jason Hollands explains, if you assume an annualised growth rate of 5 per cent, even if you stopped contributing after 18 years, compounding could mean a pension worth an astonishing £1.05m by the time your child is 65. Remember, however, that under current rules, the pot can’t be accessed until they turn 55, so you may want to combine a pension with a shorter-term option.