If you’re a parent, you’ll likely want to make sure that your children and grandchildren have the best start in life. As such, setting aside wealth for your family might be a priority when creating your financial plan.
You wouldn’t be alone in this as the Independent reports that the average UK parent has £4,001 saved for each of their children. Additionally, it’s estimated that parents who are actively saving could have an average of £13,500 set aside for each child when they reach 18.
A nest egg could be incredibly valuable for your children or grandchildren as it may help them reach financial goals such as going to university, buying their first home, or getting married.
Additionally, you may find it easier to save for your family if you consider different ways to hold the wealth, and ISAs could be a useful option.
You may already use Cash or Stocks and Shares ISAs to save for the future because they offer certain tax benefits. For instance, you don’t pay Income Tax, Capital Gains Tax (CGT), or Dividend Tax on growth you generate from wealth in an ISA.
However, did you know there are other types of ISA that might help you build wealth for your loved ones?
Read on to learn about two lesser-known ISAs that could help you build a nest egg for your children and grandchildren.
A Junior ISA could help you build wealth for children and grandchildren from a young age
Starting to save money for a child or grandchild as early as possible could mean that you’re able to set aside more wealth for them. You may also give their savings more time to grow, meaning they have a larger nest egg to utilise when they’re older.
As such, you might want to consider opening a Junior ISA (JISA) for your child or grandchild early in their life.
A JISA is a specific type of ISA for children, and you can begin contributing from the day your child or grandchild is born. You have the option of paying into a Cash JISA or investing on their behalf using a Stocks and Shares JISA.
You can build wealth in a JISA for your children or grandchildren until they turn 16, at which point they can make their own decisions about how to manage their savings. They can then make withdrawals when they’re 18, as the JISA automatically transfers to an adult ISA.
As of 2024/25, you can pay £9,000 into a JISA each tax year. This JISA allowance is separate from your own £20,000 ISA allowance. You can use the entire £9,000 allowance to pay into a single JISA, or you could use it across both a Cash JISA and Stocks and Shares JISA as you see fit.
As with adult ISAs, JISAs enjoy the same tax benefits, with returns and interest free from Income Tax, Dividend Tax, and CGT.
Conversely, if you hold wealth in a standard savings account or purchase stocks and shares in a General Investment Account (GIA), you may pay some tax. As such, a JISA could be a more tax-efficient way to start building a nest egg for your children or grandchildren.
Bear in mind that only a parent or legal guardian can open a JISA. Anybody can then contribute to the account once it’s open.
A Lifetime ISA could help adult children or grandchildren work towards financial milestones
As your children and grandchildren grow older, they may still need your help when saving for crucial financial milestones.
For instance, according to the Guardian, 37% of first-time buyers in 2022/23 relied on a gift from family members for their deposit.
If you want to support your children or grandchildren in buying a home, or making a start on their retirement saving, a Lifetime ISA (LISA) may be useful.
A LISA must be opened by somebody aged 18 to 39, and they can contribute up to £4,000 a year until they are 50. This £4,000 counts towards their normal ISA allowance of £20,000 in the 2024/25 tax year.
A key benefit of a LISA is that the government contributes a 25% bonus, up to a maximum of £1,000 each year (25% of the £4,000 LISA limit).
There are both Cash and Stocks and Shares LISAs, and these also come with the same tax-efficient benefits as other types of ISAs.
However, your child or grandchild can only withdraw funds from their LISA before the age of 60 if they are using the funds to buy their first home. If they withdraw for a reason other than this before age 60 they’ll face a 25% withdrawal charge.
A LISA may be a useful way for your adult children or grandchildren to save for their first home or set aside wealth for retirement. The additional bonus from the government could make it easier for them to build their savings and achieve their goals.
Only the account holder can open a LISA and contribute to it. But, if you want to support your children or grandchildren, you might offer guidance to help them open their account and start paying in.
Additionally, you’re free to gift wealth that they could then pay into their LISA. This may be an effective way to pass wealth to your children and grandchildren and help them reach important financial milestones.
It’s important to note that you’re subject to Inheritance Tax (IHT) gifting rules when passing wealth to your children or grandchildren. As such, you may want to seek professional advice to ensure that you are being as tax-efficient as possible.
Also, when your child or grandchild turns 18 and their JISA changes to an adult ISA, they may be able to transfer some of that wealth to a LISA. However, they are limited by their £4,000 LISA allowance so might not be able to move all their savings at once.
Taking advantage of these two lesser-known ISAs could help your children or grandchildren build a nest egg so they can begin working towards their financial goals.
Get in touch
We can help you explore the most effective ways to build wealth for yourself and your loved ones.
Email enquiries@blackswanfp.co.uk or contact your adviser on 020 3828 8100.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
The post 2 lesser-known ISAs that could help you build a nest egg for your children and grandchildren appeared first on Black Swan Financial Planning.
“Black Swan Financial Planning was established in 2000, and since then became one of the top independent financial adviser firms in the UK.”