With the burden of university fees, housing deposits and rising living costs, the calls from adult children on the Bank Of Mum and Dad will only intensify in the coming years.
Recent figures from the Institute Of Fiscal Studies suggest £17 billion is gifted or loaned by parents to their grown-up children each year, with 30 per cent of young adults receiving at least £500 from parents in any eight-year period.
But finding the money to help children can be tough. One solution is to start saving for them soon after they are born, so the nest egg has time to grow.
Emma Lou Montgomery, associate director for personal investing at investment group Fidelity, suggests using tax-efficient structures to save for a child’s future.
These include Junior Isas, as well as pensions for children, known as Junior Sipps – or JSIPPs for short.
Here are some of the main ways to do it, and the pros and cons involved.
Junior Isa
With a structure similar to an adult Isa, adults can put up to £9,000 a year into a Junior Isa, to grow tax free whether it is in cash savings or stocks and shares.
Pros: As well as being free of tax, the money put into a child’s Junior Isa does not eat into a parental Isa allowance. Once the child reaches 18 it becomes an adult Isa, keeping the tax benefit.
Your money could grow substantially over time. Skipton Building Society offers a Junior Isa at four per cent for cash savings. If you put £63 per month into this account from the birth of your child, you would have over £18,000 by the time they turn 18, assuming the rate stayed the same over this period.
With a stocks and shares Isa, Fidelity calculates that just £55.50 a month over 18 years would yield an £18,000 savings pot if investments made five per cent a year, but of course your investments can rise as well as fall.
Cons: The major drawback of a Junior Isa is that your child has full control of it as soon as they turn 18, which means some parents worry that they will blow the money on something unsuitable.
Junior SIPP (Self-Invested Personal Pension)
With this pension for a child, the government adds in money that increases your contributions. Each child can have a total of £3,600 a year, or £300 a month, saved into a pension.
Pros: As well as the tax-free advantages of an Isa, the government tops up the payments by 20 per cent. For your child to have the maximum £3,600 a year, you only need to contribute £2,880. When your child starts work, they will already have a pension in place that will have many years to grow.
Cons: The major drawback is that your child cannot access a pension until they are in their fifties, and this age could rise – so a Junior Sipp will be of no use to your child when they go to university or need a first-home deposit.
Parental Isas
Saving for your children in your own Isas gives you the choice of cash or stocks and shares savings, while you retain control of the money.
Pros: Your child does not get hold of their money at 18 unless you want them to, and it can still grow tax free within your Isa. Parents now have £20,000 each as an Isa allowance, which may be enough to save for children as well as other necessities, depending on family income and goals.
Cons: For those with larger savings ambitions, saving for children will reduce the Isa allowance that can be used to save for other things. By not keeping children’s savings separate from adult ones, there is a temptation to spend them on other things. Cash Isas for adults do not always have rates as high as for Junior Isas, although at present there are long-term cash Isas available at four per cent interest.
‘At 18, our son will get a Junior Isa nest egg’
Stephanie Miller and her husband, Doug, have been putting £20 a month into a Junior Isa with Chelsea Financial for son Oscar, who is now aged two.
‘We just want to protect him for the future, really.
‘And when it comes to the time where he can actually get the money out, hopefully it will have a decent amount in there, which he will be able to put towards something that he wants,’ says Stephanie, 43. ‘It makes us feel a bit more safe and secure as a family as well.’
Stephanie, from Bath, chose to invest the money for Oscar into a managed Chelsea fund, and says she tries not to look at performance too often, knowing that this is a long-term product. ‘The stock market can be volatile and it can put your head into a bit of a spin if you monitor it too closely.’
Because the Junior Isa will be handed over to Oscar when he turns 18, Stephanie hopes he will be ‘sensible and wise’ with the money.
‘It’s our gift to him – he can do what he wants to do. It doesn’t worry me.
‘I hope at that point in our lives we will be able to have an open discussion about it.’
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