If you want to invest for your children, it’s a lot easier than it used to be. There are plenty of tax-efficient options that help you save for your child’s future – including pensions for babies! (Yes, really).
Take a look at the different ways you can invest now for a rich future for your children.
Junior ISAs were introduced as the long-term replacement for Child Trust Funds in November 2011.
You (and other members of the family) can save up to £9,000 into a Junior ISA for your child or grandchild. The Junior ISA is held in the child’s name. Money can then be withdrawn when they turn 18.
The money saved can be used on university fees, a housing deposit or simply to give them a good start in life. They have the same tax benefits as adult ISAs. This means they have no capital gains tax and no further tax on any income.
If you save £300 per month into a stocks and shares Junior ISA from birth your child could benefit from a lump sum of nearly £104,000 at age 18, assuming a 5% annual return.
There are two types of Junior ISAs: Cash Junior ISAs and Stocks and Shares Junior ISAs.
Cash Junior ISAs
It won’t come as a surprise to know that Cash Junior ISAs offer very little return right now. In fact, Cash Junior ISAs have never been particularly great, at least compared with the stocks and shares ones, as kids have 18 years for their pots to grow and savings accounts have never kept up enough with inflation to make them worth it.
Stock & Shares Junior ISAs
As children have 18 years for their ISAs to grow, it’s really worth considering a Stocks and Shares Junior ISA for them.
Over time Stocks and Shares outperform Cash (savings accounts) and over 18 years you have a lot of opportunity for the accounts to overcome the ups and downs of the market.
Stakeholder pensions for Babies and Children
We like stakeholder pensions. They’re both cheap and easy to open!
Originally, there were set up to aid individuals who weren’t working to save for a pension. This means that babies and small children can have a stakeholder pension.
With stakeholders you (and the rest of the family) can put up to £2,880 per year into a pension for your little one. Then, the government will bump that up to £3,600 (if you put the full amount in).
The £2,880 also falls under the £3,000 annual gift limit for inheritance tax (IHT). This means that it’ll be exempt if you die within seven years, which is just one way of transferring money IHT-free to a child.
You can set up a pension for your child from the day they’re born. It’s a VERY long-term investment – but it’s a good way to protect any inheritance you want to leave them.
Putting money into a pension for your child doesn’t attract inheritance tax, and there’s plenty of time for funds to grow. Even if you pay in £100 a year for their first 18 years of life, with compound interest (assuming a modest annual 5% rate) they’ll have a pot worth around £11,000 for your initial £1800 investment when they reach the age of 55. Expand that to paying in £1000 a year for 18 years, that’s a retirement pot well over £100,000!
Another way to invest for your children, is to open a Junior SIPP.
A Junior SIPP stands for a Self-invested Personal Pension. Just like with stakeholder pensions, you can put a maximum of £2,880 into an account for your child each year. The government will add £720 in tax relief, which boosts it to £3,600.
Junior SIPPS are currently free from UK capital gains taxes too. This means they are highly tax efficient and can provide a firm foundation for retirement plans. Like with stakeholder pensions, the same inheritance tax rules apply for Junior SIPPs.
If you save £300 a month from birth until the age of 18, then your child’s pension could be worth £1.03 million when they come to retire (even if they make no further contributions). This calculation assumes that your child will retire at 65, and assumes a 5% annual return.
The tax benefits of investing into a pension for your child are the biggest draw. But you may also think it’s better for them not to have access to this cash until they’ve reached a sensible age.
Junior SIPPs do come with their own disadvantages. You may not be around when your children truly benefit from the money. You’ll also need to check that money can be transferred to a nominated person if your child dies before they can take their pension.
Remember! This money can’t be accessed until your child turns 55 (this will rise to 57 by 2028).
Another great way to invest for your children is to use index-trackers.
The stock market has great potential to create better returns in the long term. Index-trackers are one of the cheapest and easiest ways to invest in the stock market.
Individual shares and unit trusts cannot normally be bought directly by a child. However, you can put one in a designated account using a bare trust for them.
Don’t forget that children have a long time to go before they need the money you’ll put away for them, so you can afford to be bold and put it into equities.
Remember! Long term returns aren’t always guaranteed.
Premium Bonds are another way you can invest for your children and grandchildren. Parents and grandparents can buy Premium Bonds on behalf of children who under-16.
In 2019, the minimum purchase of premium bonds was reduced down to £25 (from £100). While the maximum investment limit stands at £50,000.
We’re not big fans of Premium Bonds. The average return on them is equivalent to a 1% tax-free interest rate.
The odds of a single bond winning in any one month are 34,500 to one, but each month you’re in with a chance of receiving a tax-free cheque for a sum ranging from £25 to £1 million.
So if you’re a bit of a gambler it can be a safer way to have a flutter.
Gold and silver
Over the last ten years, gold has been a great investment. In 2001, one ounce fetched $270. Now, an ounce can fetch just over $1,800.
You’ll need to factor in exchange rates between dollars and sterling when you buy gold.
To invest for your children, you could buy gold or silver coins, bullion and even jewellery for your kids.
Over the years, gold and silver coins will become highly collectible and are likely to increase in value. They can be a hedge against inflation and help to diversify their investment portfolios.
Children’s savings accounts
Some bank accounts are specifically designed for children. Generally, the best ones are those that restrict access.
There are many that can be opened with just £1. You can open an account on behalf of your child. If you don’t however, they can open their account when they turn 16 or 17, it depends on the account.
hen, when your child turns 18 the account will change into an adult savings account. For example, Halifax’s Junior Cash ISA account pays 2%.
What to avoid
We’re not impressed by anything that’s called a ‘Children’s Fund’ or something like ‘Send your little darlings to university special growth fund’.
These are packaged-up and highly-marketed products (you can get them through your bank or other sales outlets) that are usually overpriced and under performing.
We would like to say that friendly societies do good products for investing for children but, again, they tend to have high charges and often don’t perform that well.