From 15 October 2017 old pound coins will cease to be legal tender. After then they can be exchanged at a bank but not spent over the counter. When exchanging old money from your child's or grandchild's piggy bank it may also be a good time to review the best method of saving for them.
There are lots of ways children can save, many of them offer tax incentives. Which is the best option for you and your offspring will depend upon the age and stage they are at and your goal for the savings.
Here is a summary of the options:-
- Newborns can start saving straight away. Junior ISAs (JISA) which allow up to £4,128 to be paid into an account each tax year. There is no income tax or capital gains tax to pay on the income and growth. Anyone can pay this in for the child until they are 18.
From then on they qualify for the adult ISA allowance of £20,000 per year and their JISA will become an ISA. From age 18 the child can access their savings or leave them invested, if the latter, they remain tax free.
Savings can be made in instalments or as a one off sum but can only be to one JISA provider per tax year for each of the cash and stocks and shares element. So if paying into a JISA for someone else's child you will need to ask the parent or guardian whether they have established one for the current tax year. Older years JISAs can be transferred to new ones if the provider is no longer offering a competitive return. This must be arranged via the JISA providers and not into the child’s bank account or the tax free status is lost.
- 16 and 17 year olds can have both a JISA and an adult cash ISA giving them £24,128 of tax free savings allowances for these 2 years. They can also opt to place part of their allowance up to £3,600 per year in a help to buy ISA, whereas the new Lifetime ISA is only available from age 18.
- All children may also have pension contributions paid on their behalf. If they have no earned income, up to £3,600 per tax year can be paid to a personal or stakeholder pension. Like the ISAs this rolls up in a tax free fund.
Pension contributions offer an immediate uplift in the form of basic rate tax relief given by HMRC on the savings made. This applies to all personal and stakeholder pensions and increases every £8 saved to £10 invested in the pension wrapper. The child does not have to be a taxpayer to qualify for this. Some SIPP providers do not fund tax relief up front, so this has to be claimed separately from HMRC.
Pension funds however cannot be accessed before age 58 and this age may increase in line with future increases in the State pension age. After that age the pension plan owner can withdraw up to 25% of the fund tax free. The balance of the fund can be withdrawn as regular income, in stages or as one lump but will be subject to income tax on the withdrawn amounts at whatever rate the pension plan owner is subject to at that time.
- Children who are over 18, but under 40, and who have not yet bought their first home, may invest in the Lifetime ISA (LISA). This enables up to £4,000 of the annual £20,000 ISA allowance to be invested this way. It will replace the Help to Buy ISA next year and Help to Buy ISAs can be transferred into the Lifetime ISA later.
The LISA can be funded via small regular savings or lump sums. Like the pension it also enjoys a 25% uplift from the taxpayer. So £4,000 saved becomes worth £5,000 automatically. Any growth on top is also tax free.
Unlike the pension, the LISA may be cashed in at any time and will be tax free, so long as it is used to purchase a first home up to £450,000 in value. If it is not used for this purpose it can still be cashed in tax free, but not till after age 60.
If it is cashed sooner or for any other reason (except on death or serious ill health) it will be subject to a 25% penalty on the whole amount withdrawn.
Both cash based investments and equity and fixed interest funds are permissible for all of these savings vehicles. When choosing an investment thought needs to be given to the timeframe over which the funds are to be invested. Investing in equities and fixed interest where the money is planned to be withdrawn in the short term is risky. Equally investing in cash for longer term goals is likely to result in investment returns below inflation while interest rates remain lower than annual price increases. See our Cash or Stocks & Shares - Which ISA is Right For You? article.
Director of Public Policy, LEBC
Please remember, no news or research item is a recommendation or advice to buy. LEBC Group Ltd is not responsible for accuracy and may not share the author’s views. If you are unsure of the suitability of any investment or product for your circumstances please contact an adviser. All investments can fall as well as rise in value so you could get back less than you invest. The Financial Conduct Authority does not regulate tax planning. Tax rates and allowances may change in future.
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