Investing in our children’s future is probably something we’ve all considered at some point, but getting it right certainly doesn’t look straightforward. There’s basic instant savings accounts to consider. And then there’s Junior ISAs – so, so many Junior ISAs. Bonds are another option, apparently. Oh, and let’s not forget about stocks and shares.
It can easily seem pretty overwhelming to say the least. Which is probably why so many of us put it off – or don’t maximise that investment potential. Choosing the right stepping stone to starting or continuing your kids’ investment journey is complex, irrespective of how little or much you have to put aside. In fact, the experts all agree that even modest savings early on could make a big difference by the age of 18, thanks to interest and investment returns.
And so, with the thought of building a nest egg for our little ones always at the back of our minds, EGG chats to our very own finance expert Jeny Beardsley about investments for children and what we should be doing now.
As a parent yourself, how important do you think investing in your children’s future is?
We all want the best for our children. We don’t know what their future will hold, but we do want to make sure they have every opportunity to do well and be happy, whatever they decide to do in life. Money isn’t everything, but it can help to give children a valuable head start. It can give them a good education, enable opportunities and help them get established when they start their adult lives.
Saving money for when our children reach young adulthood might determine whether they have the freedom to make the choices they want. It’s another way you can give them the best start in life. The financial world in which young people are growing up in now is a very challenging one, filled with uncertainty. If saving for our children was once regarded as an aspiration, it is increasingly becoming a necessity. The average debt of students leaving university is £50,000. (Source: Which? University April 2019.) That is a lot of debt to start your adult life with. The average deposit required for a first time buyer is £33250! (Source: Lloyds Banking Group February 2019.)
And, as a financial adviser, how lucrative can children’s savings be for our kids in the future?
What is important is that you start to save as soon as you can. The great thing about investing for children is that you have time on your side. It’s surprising how much relatively small amounts of money saved on a regular basis can grow over time.
It’s down to choosing the right investments and the power of compounding returns which can make a significant boost to the value of your money. To give you an example: saving £200 per month and using an average growth rate of 5% net of charges over 1 year could give you £2465. Over 5 years this would be £13,618. Over 18 years this would be £69333.
These figures are examples only and they are not guaranteed - they are not minimum and maximum amounts. What you get back depends on how your investment grows and the tax treatment of the investment. You could get back more or less than this.
When should we start thinking about investing in our children’s future? Does time affect which investment option you’d recommend?
Saving over the longer term helps to minimise risk with investments. The longer you have to go until your child is 18, the more likely I would recommend that investment options would be more suitable for some.
It’s never too late to start putting savings aside for your children though. If you are looking at investment options, I would always suggest at least five years as an investment horizon. This time frame potentially gives the investment time to correct any ups and down in the market which may occur.
If you are saving in cash based investments, the danger is, due to low interest rates and the effects of inflation, the value of the money in these types of plans can be eroded over time.
There are so many savings options available. How do we work out what’s best and how to get the most out of our savings?
There are such a wide range of investment options available that it can seem overwhelming. This is why it’s always best to sit down with a Financial Adviser and talk through your individual situation; they can help with the most suitable options for you.
The tax advantages and flexibility that ISA offer make them the first option for most savers. Returns are free from income tax and capital gains tax. Savers can typically make regular payments or one off payments or a mixture of both.
There are two types of Junior ISAs - cash (which most building societies and banks offer) or investment (where it’s put into stocks and shares), both of which allow a maximum of £9K to be invested each year. It’s important to realise that that there’s no access to the funds until the child is 18, after this age, the account converts into an adult ISA, where it can continue to enjoy the same tax advantages.
When it comes to cash versus investment Junior ISAs, The rates of interest on cash ISAs are currently a bit better than adult ISAs; the best rates are currently around 2.5 % for the life of the plan. (Source: Which? May 2021.) However, if interest rates increase over the 18 years of childhood you can be stuck in this rate. With investment ISAs, although it increases the amount of risk involved, the returns can potentially be much higher compared to cash. The good news is, you don’t need to opt for one over the other as the money in a Junior ISA can be invested in cash, shares or both. Parents are grandparents can pay into ISAs for the benefit of the child.
There are also instant access accounts. These are great for teaching kids about how to manage money and getting them into the habit of saving. The interest in most of these accounts at present is negligible and, as parents, you may have to pay tax on their savings if the interest they gain exceeds £100.
Children's regular savers is another option. With these accounts, banks often use these as headline account rates e.g. 3.5% with Halifax. However, they only tend to run for 12 months at a time and it’s not a compound interest rate. At the end of the 12 months, the money typically tips back into a low interest access account. It’s also worth noting that max savings per month are around £100. And so, at the end of 12 months the £1200 plus interest cannot be invested at 3.5%, instead it goes back down to 0.1% at present. The interest on these accounts will also be taxed as though it is the parents' money.
You can opt for investments set up in a trust. These accounts are set up by the parent or guardian for the benefit of the child, but are in the adult's name. This way the adult has control over when and how the child receives the money. It allows you to invest as a parent or grandparent for the benefit of a child without the child knowing. However, is does not enjoy the same tax benefits as ISAs, and again any growth over £100 is taxed as though it is the adults.
Another savings option, which is often overlooked, is to set up a bare trust. This is sometimes known as a designated investment account. This is often a solution for grandparents who wish to invest money for the child but who want to keep control over the money until the child is much older. Unlike ISAs there is no limit on how much can be invested. As long as someone other than the child’s parents makes the investment, the assets are taxed as though they belong to the child, which usually means that there is little or no tax on any income or gains.
What is less well known is that children can also have a pension fund as soon as they are born – and setting one up can bring significant tax advantages. Even if your child is a non-taxpayer, they will still get basic-rate tax relief on contributions. That means a maximum of £2,880 a year is automatically grossed up to take account of tax relief, giving an annual investment of £3,600. Under current legislation, savers can gain access to their pension fund at 55. But the benefits can be felt long before that.
So saving into a pension for your children will ease the pressure on them to start their retirement planning while they are just starting out in their careers and facing the costs of starting a family and buying their first home. Investing £3600 into a pension each year for a child up until they reach 18 could create a pot for them at 65 of up to £1,030,000. This assumes an annual growth rate of 5%.
These figures are examples only and they are not guaranteed - they are not minimum and maximum amounts. What you get back depends on how your investment grows and the tax treatment of the investment. You could get back more or less than this.
Do you recommend investing a lump sum or can monthly amounts work just as well?
Both options are good and more often driven by the client's preference and circumstances. By saving monthly into investments, this can have the bonus effect of reducing risk. It means you are buying into investment at different price points each month. So, if the markets are down, you will buy more units (like buying in the sale, I suppose). If the markets go up, all the units you hold increase in value. It therefore allows you to benefit from both ups and downs in the markets.
For those who don’t want to have any risk or lose investment, what’s the best option?
It would have to be an ordinary cash account. Although I would always caveat this by explaining that whilst £100 in a cash account will never be less then £100, in 18 years’ time what that £100 can buy will be quite different to what you can buy now. This is the effect of inflation. The risk with cash is that it doesn't keep pace with inflation and most ordinary child savings accounts pay well below inflation. Cash accounts are great for short term savings and for holding money you know you are going to need in the next few years.
For more information on Jeny or to book a Financial Planning appointment visit Jenyfer Beardsley - Financial Adviser - Edinburgh
Jenyfer Beardsley is an Appointed Representative of and represents only St. James’s Place Wealth Management plc (which is authorised and regulated by the Financial Conduct Authority) for the purpose of advising solely on the Group’s wealth management products and services, more details of which are set out on the Group’s website www.sjp.co.uk/products. The 'St. James's Place Partnership' and the titles 'Partner' and 'Partner Practice' are marketing terms used to describe St. James's Place representatives.
The value of an investment with St. James's Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.
Equities do not provide the security of capital which is characteristic of a deposit with a bank or building society.
The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief is generally dependent on individual circumstances.
Please note Cash ISAs are not available through St. James's Place
Trusts are not regulated by the Financial Conduct Authority.