Uncertain times push children’s savings into the spotlight
01 Aug 2016
- Almost seven million under 18s have no tax-efficient savings account
- Parents could be paying tax on kids’ savings unnecessarily
The EU Referendum result has caused turmoil across the globe, with one of the major concerns arising being of an unclear economic future, and potential lack of provision for future generations.
Whilst there have long been tax-efficient savings vehicles in the UK, many of these are still not being used effectively, leading to huge amounts of tax paid out unnecessarily. Data from Prudential and unbiased.co.uk, the site that connects millions to advice, reveals that for young savers and their benefactors, there are still ways in which money can be made to work harder for the long term.
Tax Action 20161 found that the £1.3bn that was wasted last year2 through a lack of take-up of ISAs and Junior ISAs would have risen in 2016 to £1.95bn, as people failed to take advantage of the new ISA saving allowances. Whilst the new interest-free savings allowance introduced this April means that any basic rate taxpayer can earn up to £1,000 in interest without paying tax on it, ISAs and Junior ISAs still have a place for tax-efficient saving.
Karen Barrett, chief executive at unbiased.co.uk, comments: “In the current environment of historically low interest rates, there seems little incentive to save. However, given that today’s young people are the ones facing the most uncertain future economically, a Junior ISA is still a good bet as it locks the money away until the child turns 18. Returns on cash are poor at the moment, but children can also have a Stocks & Shares ISA, which over the long term could deliver significant returns and provide a good lump sum once the money is accessible.”
Analysing the most recent (and final) statistics on the now ceased Child Trust Fund accounts, Prudential and unbiased.co.uk found that between January 2005 and December 2012, 6.3 million child trust funds were opened, and of these, 1.3 million funds (21%) had contributions made into them in addition to the amount provided by the government. During its last year (2012) the average additional contribution was £295.3
Comparing these figures to the most recent from HMRC, 365,000 Junior Cash ISAs have been opened since their introduction in November 2011,4 and have an average subscription value of £1,110 per account, adding up to a total of £405 million. With the 6.3 million CTFs, this equates to a combined take-up of junior savings products (CTF or Cash JISA) of 49%, meaning that just under 7 million under-18s are still without any tax-free savings account or CTFs in their name.
If the 7 million under-18s without a savings account were to open a JISA, and the same rate of savings activity as witnessed with CTFs was applied, 21% of those accounts would receive contributions of an average £295. This equates to an additional 1.4million under-18s year olds putting aside a total of £422million annually.
Karen Barrett continued: “The main thing is for parents and grandparents not to eschew savings for their children – it might not look like a good use of funds right now, but with the lack of certainty for today’s youth, it’s crucial to establish long-term savings plans for your children as far as you can afford to do so.”
Whilst children can earn up to £17,000 in interest before paying tax5 (theoretically making the tax wrapper pointless for all but a small minority with very high savings), a Junior ISA can act as a protection for parents, as all contributions made by parents would otherwise be counted as their income and therefore be liable to tax. By putting the savings into a JISA the money is protected for both the future (as it can’t be accessed until the child turns 18, at which point the money is transferred into an ISA thus retaining its tax-free status), it also protects the parents’ tax-free allowance.
Les Cameron, tax specialist at Prudential, comments: “Thinking about saving money for children or grandchildren in a climate of low interest and market volatility can be a challenging prospect. In such cases independent financial advice is critical and consideration might be given to funds which aim to smooth out this volatility to give the parent or grandparent the confidence that money will be available when it is needed most. This is whether the long-term saving is for funding school fees, university fees or simply give the young person a start in life.
An adviser can ensure that the investment is set up tax efficiently and provide guidance on the use of trusts where necessary. In addition, it is possible for adults to fund pension contributions for children (young or old!) as we know that regular saving is a habit – getting that habit early on means you’re more likely to save throughout your life and generally have a savvier attitude to finances overall.”
For more information contact:
Frederica Saunders, Lansons: 020 7294 3620
For expert commentary or case studies from over 250 media-friendly advisers, journalists should visit unbiased.co.uk Bluebook - The Media Adviser Network
1 TaxAction report 2016 has been produced by Opinium Research on behalf of unbiased.co.uk. All figures are based on calculations done on unrounded values to guarantee accuracy; text paragraphs display rounded figures. Survey results come from an Opinium online survey, commissioned by unbiased.co.uk, of 2,006 UK adults aged 18+ carried out between 20th and 24th November 2015. Results have been weighted to nationally representative criteria.
22015 TaxAction Research can be found here.
5Children can earn £11,000 a year tax-free, plus the £5,000 ‘low earners’ allowance, plus the £1,000 personal savings allowance.
7Opinium Research reviewed a sample of 44 Junior ISAs available as of 9th December 2015
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