With the new school year under way you might be more focused on uniforms and books than long-term investing. But doing your homework on the dos and don'ts of investing for your children or grandchildren could make a major difference to their financial futures. And a good start, according to Fidelity International, could be not to fall foul of these five investment myths.
Myth no. 1: Children don't pay tax
Your child will pay tax on anything they earn above the standard personal allowance of £11,000 (for 2016-17). But as long as the interest they earn on any investments falls below this, there will be no tax to pay. However, the rules are tougher if the interest is earned on money from a parent.
"If your child earns more than £100 in interest in any tax year from money you have given them, then you will be personally liable for tax on the interest earned, if it's above your personal allowance,"says Tom Stevenson, investment director for personal investing at Fidelity International. "But the good news for grandparents, aunts, uncles, godparents and anyone else who gives money to a child, is that the same tax liability does not apply."
Myth no. 2: Children can't have a pension
You can start saving into a children's self-invested personal pension (Sipp) as soon as your child or grandchild is born, and each child can save a total of £3,600 a year or £300 a month into a pension. Just as with your own pension, the government tops up pension payments by 20 per cent so you only need to put in £2,880 to save the maximum £3,600 per year.
Parents can also make use of stakeholder pensions for children, which offer less flexibility when it comes to investments but are likely come with a lower price tag.
Fidelity's calculations show that that if you were to invest £300 a month into a Sipp for the first 18 years of a child's life, even if they added nothing extra during their adult life, they would have a very impressive £603,441 pension pot at the age of 65.
Myth no. 3: If you give your grandchildren money you will pay tax
While parents who save or invest on their children's behalf can face a tax bill if their child's savings or investments earn more than £100 in any tax year, the same does not apply to grandparents. Grandparents can invest in their own names and add the child's name or initials to the account, meaning they can designate or identify which assets are their grandchildren's. When the grandchildren reach 18 those assets can be transferred to them.
Any investment growth will be subject to capital gains tax, unlike with savings held within an Individual Savings Account (Isa) or pension, but this can often be offset with the child's tax allowances.
Myth no. 4: Your child can't get their hands on the money
You can save up to £4,080 in cash, stocks and shares into a Junior Isa or Child Trust Fund for the 2016/17 financial year. Your child will then have access to the money when they turn 18. You might not like that your child will be able to cash in the fund you have been saving into on their behalf when they hit 18, but both those accounts are automatically rolled into an adult Isa on their 18th birthday.
Early financial education should prevent your child from blowing their savings on a Lamborghini and there are plenty of reasons to favour a Junior Isa over a pension for children. Even if you are nervous about access, it is likely that your child will need the money for university, buying a home, or a range of other needs before they reach 55 - when they can access their pension. Don't let nerves over your child's financial responsibility prevent you from making the right move.
Myth no. 5: Once they reach 18 the Junior Isa must be cashed in
There is no need to do anything differently when your child reaches 18. Their Isa will automatically become an adult Isa. From age 16 your child will also be able to contribute into the adult equivalent of a cash Isa, in addition to any money paid into their junior Isa.
For more on savings for children see this week's Portfolio Clinic
