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Investing for the next generation

It’s never too early to start planning for your children’s future. There are specific tax wrappers aimed at children which make it possible to build up a decent sized nest egg without paying any tax.

You can open a Junior ISA as soon as your child is born and pay in up to £4,260 each tax year under the 2018/2019 allowance. There are cash Junior ISA’s and stocks and shares Junior ISA’s. A stocks and shares Junior ISA enables you to invest in the stock market and benefit from market growth. Your child can’t access their money until age 18, which means there is plenty of time to ride out any market volatility and enjoy the benefits of compound interest. If you open a Junior ISA at birth and invest the whole £4,260 a year, the portfolio could be worth £112,035 by the time the child reaches 18, assuming an annual growth rate of 4%. Even investing £50 a month is worth it, as this could produce a pot worth £15,780 at that level of growth. A vital point to remember is when the child reaches 18, they can then access the money and the parents will have no control over this. While the parents may have been saving for a house deposit or university fees, the child may have different ideas for the money like exploring the world or a new car. If this worries you and you have an objective for the money invested, it may be worth considering a child savings plan which holds the investments in your name and the investments can be withdrawn or transferred to the child when needed. The drawback of this though is there is no tax wrapper so gains above the dividend allowance of £2,000 and capital gains personal allowance of £11,700 for the 2018-19 tax year will be subject to tax unlike the Junior ISA where all gains are tax free.

The other option is a Junior SIPP where you’re able to pay up to £2,880 each tax year under the 2018/2019 allowance and the Government will add tax relief of 20% to make this up to £3,600. The time horizon of a Junior SIPP is much longer than an ISA. Under current rules, they won’t be able to access the money until age 55, soon to be going up to 58 in line with the state pension. As the investment time horizon is so long, you may want to consider investing in higher-risk assets such as shares in smaller companies or an emerging market fund.

The past performance of any investment is not necessarily a guide to future performance. The value of investments may go down as well as up.

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