There are a number of ways that parents and grandparents can start saving for children and each has its pros and cons. In recent years, Junior ISAs have become the go-to savings account for young people, with almost 1m opened in the 2017/18 tax year. Junior ISAs let you save or invest up to £4,368 a year for young people, who gain control of the account at age 16 and can access the cash at age 18.

But it is this last point which puts off many relatives, who fear their kids may spend the money they have so carefully saved for them as soon as they hit 18.

Figures from AJ Bell suggest this may not be the case – it found that just 7% of Junior ISAs are cashed out when an accountholder reaches age 18. Anecdotal evidence suggests that when children are made aware of the savings accounts and involved in the decisions about where the money is invested, they are more likely to continue investing once they take control of the account.

But for those parents who want to lock up their children’s savings for the long-term, there are other options.

CHILDREN’S PENSIONS

A Junior SIPP (self-invested personal pension) is a great way to help your child start saving for retirement. These allow relatives to save up to £2,880 a year, which receives 20% tax relief from the Government just as with any other pension, effectively topping up the amount to £3,600. Crucially, the money can’t be accessed until the child reaches age 55, a limit which is set to rise as the state pension age increases.

Tom Selby, senior analyst at AJ Bell, says: ‘Starting a pension for a child has to be the ultimate long-term investment. Because the money is locked up, parents and grandparents don’t need to have any concerns about the child reaching age 18 and then splurging the lot down the pub or on a holiday as they could with others savings pots.’

MULTIPLE BENEFITS

The benefits of saving for your child in such a way are plentiful. As defined benefit, or final salary, pension schemes become a rarity, young people face a greater challenge in saving enough to supply a decent income at retirement.

That is particularly true when you consider that many young people are graduating with large amounts of debt from university and then face the challenge of saving for a deposit to get a foot on the property ladder.Providing a helping hand in the form of pension savings can be incredibly valuable to those young people trying to meet these challenges.

As well as that, such long-term savings have the potential to get the ultimate boost from compound interest, where your returns grow at a faster rate as you earn interest on interest.

For example, let’s say you saved £240 a month in a child’s SIPP – topped up to £300 by tax relief – from birth and you incur 1.25% annual charges. You would have contributed £54,000 by the time they turn 18. Assuming 5% annual growth rate from the start and no further contributions after they turn 18, your child’s SIPP would be worth nearly £330,000 by the time they reach age 60.

But there are drawbacks to this approach too, experts point out. First and foremost is that parents and grandparents saving for their young relatives in this way are unlikely to ever get to see the child reap the benefits of their hard work. This flies in the face of the idea of a ‘living inheritance’, where money is gifted during someone’s lifetime rather than left in a will, which is becoming increasingly popular among those looking to pass on their wealth.

Also worth considering is the potential tax problem you are creating for a young relative by saving in this way. We have used 5% annual growth in these calculations but in recent years investors have enjoyed double-digit gains in their portfolios – higher growth could see the pension pot breach the lifetime allowance of £1,055,000, after which pension savings are subject to hefty tax.

Ammo Kambo, chartered financial planner at Brewin Dolphin, says: ‘There are many things to consider when saving for children but the financial goal at the outset is often the sensible first step – the final decision should be based on what you want the child to do with the money once they’re of adult age.’

Other ways to pass wealth to children:

Money left in trust – a legal arrangement set out in a will, whereby a young person can be left money that they can’t access until a specified age. May fall outside of the value
of your estate for inheritance tax purposes -– although it is worth seeking tax advice to fully understand the rules.

Premium Bonds – no guaranteed return but the value of the bonds will never fall

Life insurance – a policy which will pay out £100,000 to children when you die can cost just a few pounds a month

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