Pension or JISA? The best way to save for your child or grandchild

The best way to help your child or grandchild secure a stable financial future is to save on their behalf. And to start saving early.

Whether you want to help them through university, onto the property ladder, or even provide them with income in retirement, putting money aside when they are young gives that money the best chance to grow.

There are different savings and investment vehicles you might choose, and the right one for you will depend on what you want the money to be used for.

Through careful planning, and by combining different investment options, it might even be possible to make your child a millionaire.

Here’s how Credencis can help.

Starting a pension early could provide financial security in later life

You should consider starting a pension for a child or grandchild as soon as they are born.

Pension funds can’t be accessed until age 55 – rising to 57 in 2028, and likely to increase further by the time your child is old enough to receive their pension.

This ties your money up, but also allows it plenty of time to grow, making the most of the upward trend of the stock market, and the effects of compound growth.

Pensions are tax-efficient, and you will benefit from tax relief on your contributions, even if your child has no earnings or earns less than £3,600 a year. The maximum you can contribute is £3,600, but due to tax relief, that contribution will only cost you £2,800.

Using our Pension Calculator, you can see that contributions of £3,600 a year could amass a total pension fund of over £580,000 over fifty years. That is based on 1.4% inflation, 5% growth and an annual management charge (AMC) on the pension funds of 1.5%.

Starting as soon as a child is born and paying in for 60 years or more could reap even greater rewards.

As a UK taxpayer, your child will receive tax relief on contributions of up to 100% of their earnings or £40,000, whichever is lower. This is known as the “pension Annual Allowance”. It means your child can contribute even more, and benefit from a larger level of tax relief once they start earning.

The drawbacks of a pension

The obvious drawback of a pension is that money is tied up until your child or grandchild reaches the minimum retirement age.

This means that you wouldn’t opt for a pension if you wanted to help a child onto the property ladder, or through university, for example. A pension is still a great option for building long-term wealth, though, and for providing financial stability in later life.

Consider starting a pension for your child’s retirement, while using other savings and investment products to help fund earlier life milestones.

A Junior ISA could help a child onto the property ladder – and to become a millionaire

If you are looking to save money for an event within the next few decades – possibly for a child or grandchild to use to help them through further education or into their first home – you’ll want that money to be easily accessible. A Junior ISA (JISA) could be a great option.

A JISA must be opened by a child’s parent or legal guardian, but you can then pay into it as a parent or grandparent, on the child’s behalf.

Like pensions, JISAs and ISAs are tax-efficient. They also have limits on the amount you can save.

In the 2021/22 tax year, the annual subscription limit for a JISA is £9,000. This means you can contribute up to £750 a month to a child’s JISA.

There are two main types:

Any interest earned on a Cash JISA is tax-free. Gains made on a Stocks and Shares JISA are free of both Income Tax and Capital Gains Tax (CGT).

Based on a growth rate of 5% and factoring in a 1.25% annual charge, but not inflation, a £9,000 annual contribution from birth could see your child reach aged 18 with £228,919. Keep this invested, and your child could be a millionaire by the time they reach aged 44.

As with pensions, the contribution limit rises once your child reaches adulthood. The current annual subscription for an adult ISA is £20,000 a year.

The drawbacks of a JISA

A JISA converts to an adult ISA at age 18, at which time your child or grandchild can withdraw money from their fund. They can, however, start to manage their account from age 16.

This could make a JISA great for helping to fund university, but you’ll need to be clear that from age 18 your child will be able to access their money and use it as they see fit. Their decisions might not align with your wishes.

If you want to save for a child but retain some control over how that money is used, you might consider other means of supplying the funds, such as through a trust.

Get in touch

Providing for a child’s future can be done in several ways. You’ll need to think about what you want the money to be used for and when you want the child to be able to access their fund.

A combination of a pension and a JISA could be an excellent choice, allowing you to help towards milestones early in life while knowing that their retirement is also covered.

We can help decide on the right option for you and your child or grandchild.

If you would like to start saving for a child’s future, please get in touch. Email info@credencis.co.uk or call 01158 967 538.