Guest article by Victoria Rutland, Chartered Financial Planner, EQ Investors.
What are the options if you want to invest for your child or grandchild? Find out how you can start investing and what to think about.
Why investing for children matters
As parents and grandparents we’ve tried to provide a financial boost for our offspring for many generations; it’s part of our DNA. Today, the need has never been greater:
- Following the recent rise in university tuition fees, UK students now graduate with the highest levels of debt in the English speaking world.
- Property prices have never been so out of reach. The average deposit for a first-time buyer is £44,653 according to annual English Housing Survey.
- Compared to the generous final salary schemes of the past, employers contribute less than half as much into pensions today.
The good news is that small amounts can really add up if you save or invest regularly.
Investments in your name or your child’s?
One of the simplest ways to start investing for children is to keep the funds in your own name. This gives you total control over when and how the money is accessed.
However, saving in a child’s name rather than your own is more tax efficient. Children have the same personal tax allowances as adults, so there is not usually any tax to pay on their investment income or capital gains.
Something to consider is that the child will have complete access to any money in their own name once they are 18 years old, and as such you will have to be confident in their independent financial responsibility.
The power of compounding
One of the key messages is to start early so that the money you invest for your children has longer to grow. The power of compounding means that £1 saved today should be worth much more in the future.
The chart below shows the power of investing £250 a month for ten years and then leaving it where it is for another ten years. This assumes a steady growth rate of 5% after charges have been taken into account. It’s a start most 20 year olds would dream of.
Selecting an investment strategy
Investing for a child normally means you have a longer time scale. This situation is ideal for adopting a more adventurous investment strategy. This does mean you have to be comfortable with greater volatility (ups and downs in the value of your investments) that comes with the potential for greater returns in the long term.
Fluctuations in stock market values can be advantageous to regular investors as a result of the phenomenon called ‘pound cost averaging’, whereby your money buys more when markets are depressed.
This all suggests that a child’s portfolio should be invested largely in equities (shares in companies) and property, since these are the types of asset that, historically, have always produced the highest returns, over the long term and in excess of inflation (inflation reducing the ‘buying power’ of money).
Two smart ways to invest
Choosing the right account to give your children the best possible start in life is vital. Two of the most popular options to consider are the Junior ISA (JISA) and Junior SIPP (self-invested personal pension).
|Junior ISA||Junior SIPP|
|– Tax free
– Simple to set up & lots of choice
– Can save up to £4,368 in 2019/20
– Potential Inheritance Tax saving
|– Tax top-up on annual contributions up to £2,880
– Tax free growth
– Inheritance tax saving on regular gifts
Junior ISAs (sometimes called JISAs) are a simple way to save for a child’s future. There are lots on the market to choose from and they are usually easy to open, either by depositing a lump sum or setting up a regular payment. Parents or guardians need to open the account, but once open, anyone can contribute.
The Junior ISA is the successor to the Child Trust Fund (CTF). If your child already has a CTF then you have the option of keeping it and continuing to make contributions or transferring the CTF into a JISA. Your child cannot have both.
Given the huge costs involved in raising a child and early adult life, it might seem strange to pay money to a pension which cannot be accessed for decades when there are many other expenses to worry about. However, the long term tax benefits of pensions plus the government top-up from tax relief can make for a compelling case, in certain circumstances.
Money put into a pension for a child has longer to grow in a tax-free environment, and cannot be frittered away in early adulthood.
Get EQ Investors’ free guide
EQ’s Investing for Children guide explores the main ways you can save and invest for children. Download a copy here:
SARAH’S NOTE: In order to download the guide, you have to provide your email address and be happy for EQ Investors to contact you. You can leave your phone number if you want to, but that’s entirely optional. You can ask for your details to be removed at any time, by contacting EQ Investors.
FULL DISCLOSURE: EQ Investors haven’t directly paid for this post. Companies that are premium members of our directory are invited to submit relevant and interesting content on an occasional basis. I’ve looked at EQ Investors’ Investing for Children Guide, and I thought it was interesting, so I asked them to write this article to outline some of the issues around investing for children.
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