Should you invest your children’s savings?

Posted on November 20th, 2018 | Categories - News, Savings

When we’re saving for our children, it’s natural to be cautious. You probably have plans for how the money will support them in the future, whether it’s purchasing their first car or helping them through university.

But could a risk-averse approach mean that your children are missing out on valuable investment gains?

Figures compiled by Money Mail suggest this is the case. Investing money could mean that over a 13-year period your child ends up with significantly more. The research found:

  • If someone put £1,000 into a typical savings account every year since 2005, their nest egg would have been worth £14,355 by the end of September 2018
  • But investing the same amount into a FTSE All Share Index would have meant the money grew to £25,312

With the difference being almost £11,000, investing could have a significant impact on the nest egg you give to your children as they enter adulthood.

Investing the full amount through either a Child Trust Fund or Junior ISA each year could mean an extra £21,204 over a 13-year period. It can make a huge difference to what’s achievable with the money you put to one side.

Despite this, many parents opt for cash accounts. With interest rates currently remaining low, this can mean that the money struggles to keep pace with inflation, decreasing its value in real terms.

However, one key thing to keep in mind is risk. Cash saving may not have the potential to grow as fast but the money in cash accounts are secure, assuming you stay within the limits of the Financial Services Compensation Scheme (FSCS). Investing, on the other hand, does carry risk and value can decrease.

The Money Mail calculations assume a Junior Cash ISA is paying 3.5%. The investing figure is based on the past performance of the FTSE 100 Share Index over the last 13 years, averaging at 5.5%. During this timeframe, annual returns on the FTSE 100 Share Index have varied enormously; in 2009, shares climbed by 25% but this was preceded by a dip of -32.8%, highlighting volatility. It’s also important to note that past investment performance is to a reliable indicator of future performance.

Child Trust Fund vs Junior ISA

When you’re building up a long-term savings account for your child and want the option to invest, a Child Trust Fund and Junior ISA are tax-efficient options.

Child Trust Fund: You can no longer open a Child Trust Fund account. But you can continue to add up to £4,260 annually tax-free if they already have one. These accounts can now be converted into a Junior ISA, which will usually be more competitive.

Junior ISA: Again, £4,260 can be added to a Junior ISA each year tax-free. The money is locked away until the child turns 18 when it will automatically become a standard ISA.

Another option is saving into a Junior SIPP (Self-Invested Personal Pension), building up a nest egg that can provide financial security in your child’s later years. Each year up to £3,600 can be saved in a Junior SIPP. Contributions will benefit from a 20% tax relief, so only £2,880 needs to be contributed to reach the maximum. However, as this is a pension product, the fund will be locked away, your child will not be able to access the savings until they’re 55 (rising to 57). As a result, using a Junior SIPP is not an appropriate way to save for a child’s future in many cases.

What should you consider when investing your children’s savings?

As with all investments, there’s more than one area to think about when deciding what to do with your child’s savings.

Product type

The first thing to consider is the product type you will save in. A Stocks and Shares Junior ISA is one of the most common options thanks to it being tax-free. However, that doesn’t necessarily mean it’s the right option for you.

It will depend on a range of factors, such as what you want the money to be used for, and the contributions you plan to make. If you’re struggling to decide where to save your child’s nest egg, please contact us. We’ll help you understand the pros and cons of the different options with your situation in mind.

Level of risk

Tolerance for risk is a personal decision. In general terms, the greater the risk you take with investment, the higher the potential return. Of course, alongside this is the risk that the money saved will decrease in value too.

Investment vehicles will typically offer your several portfolios with varying levels of risk. This allows you to set how much risk you’re willing to take with the savings. You shouldn’t have to take high levels of risk to potentially generate returns that are above inflation.

Investment timeframe

This consideration is linked to the one above. As a general rule of thumb, the longer you’ll be investing for, the greater the level of risk you can afford to take. Over a longer timeframe, you have more opportunity to ride out short-term dips in the market.

As a result, it’s a good idea to know what you’d like the money to go towards, or at least when you’ll be giving the gift to your child. If they’re already a teen and you want the cash to support them through university in a few years’ time, a more cautious approach may be wise. If, however, you’re using a Junior SIPP to build a pension nest egg, you may choose to take on more risk. A SIPP would not be accessible until the child turned 55, so it must be your intention to save for their retirement rather than other milestones, such as buying a house or education.

Fees

Alongside projected returns, it’s important to factor in fees that will be payable. Without this consideration, you may not pick out the best product on the market for you. If you’ll be transferring an existing Junior ISA or Child Trust Fund, you should also check that a transfer will be accepted and any associated cost of doing this.

Tax liability

Many people aren’t aware that children are liable for Income Tax too. For most parents, it’s not an issue that will affect them when saving for their child. But if your child has a sizeable portfolio in their name that generates an income, it’s worth understanding their tax liability. If this is an issue you’re faced with, please contact us. There may be steps you can take to reduce tax liability.

If you’re saving with your child in mind, we’re here to help you. We’ll help you understand which saving options are best for you and your money goals, giving your child a financial boost as they enter adult life.

Please note: The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor. The Financial Conduct Authority does not regulate tax advice.

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