Not long ago, the UK government started advertising its program to encourage families to save for their children’s future. The name of the program is Junior ISA – Individual Savings Account. It starts off just like an ordinary savings account – you put the money in and get some interest added. However, the savings in ISA are completely secure and tax-free. Finally, as soon as your child is 16 (for a cash ISA) or 18 (for a stocks and shares ISA), they get full control of the money.
As we all know (sometimes too well), this only works if the interest rate paid on your savings beats inflation – which it doesn’t always do. To tackle that issue, there is an alternative way of saving under the Junior ISA scheme. You can invest in securities, with returns dependent on the performance of the underlying bonds and shares.
In the 2020/2021 tax year, you can put up to £9,000 into a Junior ISA. You can split that sum between the two ways of saving: bonds and shares, in whichever percentage split you wish.
Another way would be to let your child make this decision. It could be a very valuable exercise which will teach them the basics of banking and investing. Moreover, it would also give them a chance to really affect their own financial future and understand how important savings are.
If your child is a bit too young to be wholly trusted with deciding where the money should go, it is still a very good and helpful example for them to see you continuously setting aside money. It will even help them to understand why not everything they want can (or should!) be bought immediately.
Another advantage of an ISA is that the money is covered by the Financial Services Compensation Scheme. You have to make sure are that your ISA sits with a UK provider and that you have less than £85,000 with the financial institution in question. If the institution goes bankrupt, the money is covered up to £85,000 per institution. When your child turns 18, their Junior ISA will automatically become an adult ISA, meaning that none of the tax-free benefits are lost.