Investing for Children?

Investing for Children

Investing is important to help your children or grandchildren achieve their financial goals, whatever they may be.

Why use Investments rather than Cash?

Although a savings account is one of the first places you might look to when saving for the future, the interest rates being offered now are so low that they are not keeping pace with inflation.  With low interest rates, alternatives to cash are required and the financial markets are one way to make your money work harder for you for the future to achieve the results you want.

The trend of equities outperforming both cash and inflation has held over the last 100 years.

Main Characteristics of Junior ISAs and Pensions

A Junior ISA (JISA) is likely to be the most flexible choice. 

Up to £4,260 can be invested in the 2018/2019 tax year and all earnings are tax free.  Only a person with parental responsibility can open a JISA for their child but other family members can contribute.  The money is locked away until the child reaches the age of 18 when it becomes theirs to spend as they like.

Over a period of 18 years you could potentially invest £76,680 into a Junior ISA.  Assuming the average compound annual growth rate of 6% (net of costs), in 18 years, an amount of around £142,000 would have been built up!

JISAs launched in 2016, taking over from Child Trust Funds (CTFs). 

All children born between 1^st September 2002 and 2^nd January 2011 were eligible for a CTF account.  The government initially offered families a £250 voucher when their child was born and another £250 at the age of 7. 

If the vouchers were not paid into an account opened by the parents then they were allocated to a default “stakeholder” fund which was typically a UK equity index tracker. 

The government payments were scaled back from August 2010, until the scheme was scrapped in January 2011. 

A CTF can be transferred into a JISA. 

Saving into a pension for a child may not seem an obvious choice as the usual reasons for saving for children involve them using the money for life moments that are likely to happen before retirement.  However, this may make you think again:-

You can contribute up to £2,880 a year into a pension for a child.  The state tops up this contribution by £720 to £3,600 in total.  Over 18 years, your total spend would be £51,840, which would be topped up to £64,800.  Assuming an average compound annual growth rate of 6% (net of costs), the child would have around £120,017 in their pension pot after 18 years! 

A pension may also be more appealing if you want to save for a child but are concerned how they might use the money because JISAs give children access to their money at age 18, when it becomes a standard ISA.

An Alternative

An alternative to setting up the investment directly into the child’s name is to open an investment account in your own name but designated to the child.  This gives you complete flexibility of access, so you can get to it before age 18 if needed – and you can hold it back for later in life if you feel that is more appropriate.

The downside is that, because the investment remains in your name, it would be taxed as yours if applicable.