- Think long-term – what is likely to deliver the best return between now and the child’s 18th birthday?
- Cash is not necessarily ‘risk free’ – low interest rates could mean cash savings will be worth less in 18 years simply because of inflation
- Do something! You don’t have to commit to regular or minimum contributions. Roundups, cash-back, other family members can all help make a real difference to the child’s financial headstart
You have to go back to medieval times for the reasons why the UK tax year ends on April 5th. Thankfully, however, today the opportunities for you to save on your tax bill are significantly more modern.
There are lots of things savers and investors can consider before 5 April to make the most of their money (see this useful 10 point check-list from the team at This is Money). But the one thing that ties them all together is the mantra “take advantage of your tax-free allowances”.
Every adult has their own individual ISA allowance of £20,000. This means you can save or invest up to £20,000 each year and all the growth, be it through interest rates or stock and shares, will be tax free.
It’s a case of “use it or lose it” when it comes to your ISA allowance, so the first question you should be asking is are you making as a full use of it as possible before this tax year’s 5th April deadline?
Which type of ISA and JISA are right for your family?
Your total ISA allowance of £20,000 can be split any which way between Cash ISA and Stocks and Shares ISA. It’s up to you and your personal circumstances and preferences. Do you want to have instant access to the cash, or are you putting money away for the longer-term future? Or perhaps you want a bit of the best of both?
If you’re just after a tax-free wrapper around your savings, then a Cash ISA may be the way to go. Rates can and do vary between providers, but one thing is common to them all – the rate of interest is currently very low. So low in fact that any money you gain in interest may be eroded by inflation over time.
In contrast, if you’re looking longer-term, then a stocks and shares ISA which tracks the performance of global stock markets – including large companies such as Amazon, Facebook, Google and Johnson & Johnson – may be a better option. Studies such as the Barclays Equity Gilt Study in 2019 showed that over 50 years, UK shares would have returned 4.7% whereas cash would have returned 1.1%. In some years cash would have significantly outperformed equities but over the longer term it was the other way around.
To see the difference, This Is Money calculated that if you assume an investment return of 4.5 per cent a year after charges, a £20,000 ISA pot would have grown to £31,059 after 10 years. Over the same period, a £20,000 investment in a Cash ISA earning the average interest rate of 0.35 per cent would have turned into just £20,711. After 20 years the difference between the two pots would be £26,787.
With Beanstalk, you are in control of how you split your allowance between a shares fund and a money market fund; with a simple slider in the app showing you how changing the balance will likely shape the returns you enjoy.
Build for your children’s future
If the difference in value between a Cash ISA and a Stocks and Shares ISA for an adult is so stark, then it’s just the same for children and their financial future.
Children, like their parents and grandparents, have their own personal annual tax allowances. For a Junior ISA, the allowance is £9,000 a year. While it’s important to remember that they won’t be able to access their money until 18 (and it is their money), it does mean you should look at saving for your children as an 18-year time horizon.
Using the same calculation as above, if you took full advance of the £9,000 allowance each year, when your child turned 18 their stocks and shares JISA would be worth over quarter of a million pounds. That’s not just a house deposit, that’s a house!
But if you can’t save the full JISA allowance (and let’s face, very few of us can!) is it still worth bothering?
The simple fact is that the same maths applies whether you’re saving £90 or £9,000. You want to give that money the best chance to grow in value so that your child can enter adult life with a financial cushion.
The Beanstalk app is designed to make it really easy to build a nest egg for your children, grandchildren or even yourself. We don't require a contribution to open a child account, and you can open an ISA for yourself for just £10.
You can top-up or create regular contributions if and when you want to, and you can even collect free money back on your shopping that’s then automatically shared between your children, and roundup your purchases to save little and often.
We make it easy for the whole family to participate, so gran, grandad, uncles and aunts can all chip in with birthday money and work together to build a pot of money to give kids the best possible launch into adult life.
So, why not use the end of this financial year to not just save a bit of tax, but to start building something for your family’s future.