The ISA strategy I used to build nest eggs for my kids

The long summer holidays are just getting going. For teens up and down the country it’s an opportunity to switch off and forget about quadratic equations, oxbow lakes and Shakespeare, at least for six weeks or so.

But if you’ve got an older teen who has finished school for good, you might not be feeling quite so laid back.

Whether your child is headed for university, an apprenticeship or attempting to get a job, September will bring about a huge financial shift. They might have just become adults, but they will likely still be financially reliant on you for some years to come.

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It’s a stage I’m fast approaching with my 17-year-old son, who wants to go to university once he finishes his A-levels next year. Like most parents, I’m torn between encouraging him to stand on his own two feet and not wanting him to finish his four-year course drowning in debt.

It means we’re collectively having to take financial stock and review what we’ve saved. It’s also a time for frank, family-wide conversations about money and how we’ll support him (and his younger brother) over the next few years.

How much can we help with the cost of tuition, rent and living expenses? How much will he need to borrow?

Then there’s discussions around university choices and the cost of living. I broke into a cold sweat when he briefly suggested studying in London and quickly pointed out just how expensive life in the capital would be.

The decision, of course, shouldn’t be driven by money (feeling guilty, I did then backtrack by suggesting that London was also perhaps a little too close to home). Nonetheless, we can’t ignore the fact that life at some universities will be substantially more expensive than others, and price does need to be taken into account.

Why saving for children matters

We all know kids are expensive. But when you’re knee deep in nappies it’s difficult to think much further ahead than their next sleep.

Sometimes, it’s only when they get older and you begin thinking about university education and financial pressures like buying their first home, that you come to realise just how helpful it will be to have some money set aside for the start of their adult life.

Everyone talks about the costs of the pre-school years when you’ve got crippling childcare costs to pay. But the university years can be just as hard if you’ve got your child’s rent to pay on top of your mortgage. If you’ve got more than one and they’re close in age, you could end up with some whopping bills.

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Parents’ views on student borrowing are mixed, but even with loans there’s still likely to be a shortfall for lots of families.

Saving regularly throughout their childhood and letting the compounding of returns do the heavy lifting, means you’ll need to save less overall than if you leave it to the last minute.

And by having a pot that’s ring-fenced for these costs, it will spare you having to dig into personal savings or make cutbacks to your household budget.

Getting started

The starting point for lots of parents is a junior individual savings account (JISA).

Each year parents, family members and friends can save up to £9,000 into a JISA on behalf of a child. The money grows tax-free, but it cannot be accessed until the child turns 18 – making it ideal for long-term savings goals.

Like adults, parents can choose between cash and stocks and shares accounts.

But while a cash ISA might seem like a “safe” option for a child, over an 18-year investment horizon their money is likely to grow faster if it’s invested in a balanced portfolio of stocks and shares.

And their nest egg could be particularly impressive if you’re able to take advantage of the full JISA allowance.

For example, a family that saves £9,000 a year on behalf of a child from birth to age 18, could see a lucky teenager start adult life with a nest egg worth close to £256,000 (based on average returns of 5% a year, before charges).

Indeed, earlier this year, a freedom of information request from Murphy Wealth, revealed that the top 25 Junior ISAs are now worth an average of £397,500 - nearly eight times the average student debt in England (£53,000).

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But saving little and often can still net you a decent sum if you get going right from the start. Just £50 a month from birth to 18, could give them a nest egg worth nearly £17,500 (again assuming an average 5% return).

And grandparents can get involved too – if they want. This can be particularly helpful if they’re trying to mitigate inheritance tax (IHT) at the same time. Each year it’s possible to give away £3,000 a year IHT free. Spread that between three grandchildren’s ISAs every year to 18 and they could end up with nearly £28,500 each.

We’ve opened investment accounts for our two (our eldest started off with a child trust fund which were scrapped in 2011, before switching to a JISA).

We haven’t ever saved £9,000 a year, and we didn’t start from day one, but we did get going when they were still pretty little. And, since then we’ve paid in something every month.

It means that when they do turn 18, they will have a little nest egg to fall back on.

The right wrapper for the job

JISAs are certainly a great way to save for kids, but not necessarily the perfect solution for every family.

The catch with JISAs is that you’ve got no control over how your children spend the money. You can tell them it’s for university or a house deposit, but it’s ultimately down to them to decide what they do with it.

We’ll be talking to our boys about making sensible choices – encouraging them to think about the financial challenges they’ll face over the next few years - but there’s nothing to stop them frittering it away.

It’s for that reason – like many parents – we haven’t focused all of our saving into their personal accounts.

We’re saving more into our own stocks and shares ISA each month. It’s not exclusively for our children by a long stretch, rather it’s a pot of cash that we can use to help them if we wish and on our own terms.

Each year you can save up to £20,000 into ISAs – so parents can shelter £40,000 from tax a year between them. You can keep your options open – as we are – or you can earmark specific funds within your ISA for your children, to separate it from money you’ve got other plans for.

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For the many parents who aren’t using the full £20,000 ISA allowance, it could therefore provide a lot more control than a JISA, for the savings goals that really matter to them.

That’s not to say we’re not bothered by how they spend their JISA, but by spreading our savings across different accounts, we’re at least keeping some control.

We’ve still got another year before our eldest goes anywhere and, in that time, there is still a lot of thinking, talking and planning for us all to do.

Student loans will invariably be a part of the picture, but knowing that he and we have some savings behind us, makes it easier for us all.