How to invest in your children’s future? Financial wisdom states that the earlier you invest for your future the better. Why is that? What’s the harm in waiting a while until you have a bit more money or until your circumstances change? Well let’s consider a hypothetical situation with two investors, John and Julia. John starts investing £100 per month at 30 years old and keeps going until retirement at 65. Assuming a rate of projection of 5%, John would have a nest egg of £111,298 at retirement. Julia invests the same amount but starts earlier at 18 years old. At retirement, Julia would have invested an additional £14,400 more than John but her nest egg would be worth more than double that of John’s at £219,489!
The same logic applies when investing for children. The earlier you can start investing for their future, the better. Throughout their lives, there will always be costly items come up such as school trips and pocket money to longer term costs like driving lessons, buying a first car, university fees and helping to pay for a wedding.
There are a number of ways you can begin investing in your children’s future. Here are some of the more popular ways:
Children’s Savings Accounts
- You can set up an account with a bank or building society on behalf of a child of any age. However, for the account to be in the child’s name they will need to be at least seven.
- Start an account with just £1
- These accounts offer a great way to learn how to manage money and help get kids into the savings habit. Compare the kids free debit card choices available to find the right banking solution for your child.
Junior ISAs (JISAs)
- There are two types of Junior ISA: a Stocks and Shares Junior ISA and a Cash Junior ISA.
- A child can have one Stocks and Shares Junior ISA and one Cash Junior ISA. Investments can be made into one or both plans but the total paid into all plans can’t be more than the Junior ISA allowance for that tax year which is currently £4,080 in 2016/17.
- No tax is payable on interest of investment gains.
- Stocks and Shares Junior ISAs provide access to a wide range of investment types such as shares, bonds, equity funds and investment trusts. As such, the value of these types of investment can go down as well as up.
- For more information about Junior ISAs, check out the Money Advice Service, which is a free and impartial money advice service setup by government.
NS&I Children’s Bonds
- These are 5 year fixed term bonds which are backed by HM Treasury so they are 100% safe.
- A parent, guardian or grandparent can buy the bond for the child and the child owns the bond. The parent or guardian holds them until the child is 16.
- All the interest is tax free.
- For more information about Children’s Bonds, visit the NS&I.
- Financial experts use alternative investments like buy uber shares as a way of diversifying their investments – a method used to reduce risk and increase returns.
- Alternative investments have low market correlation and can actually profit when markets go down but until now have only been available to institutional investors and the very wealthy, for example through hedge funds and managed futures.
- For the first time there is an online portfolio management service, invest.com, which offers everyone the chance to invest in alternatives giving us all access to this important asset class.
- The invest.com robo-adviser makes it really easy for you to get a customised portfolio recommendation which is actively managed for optimal returns.
- You only need £1,500 to open a managed portfolio (or £500 to invest in individual strategies). You can open a portfolio for each child or for each of their long term goals.
Friendly Society tax-exempt plan
- Friendly societies are mutual benefit organisations, which are owned by their members to work for the advantage of those members.
- Children’s savings plans terms range from 10 years to 25 years. On maturity, the child must be at least 16. Some families choose to take out a plan for each child to fund school fees maturing in different years.
- Money is invested in a share-based investment fund and the Treasury limits investments to £25 per month or £270 a year.
- The value of these types of investment can go down as well as up. Friendly Society policy charges also apply.
- As long as you continue to pay into the plan for a minimum of ten years, you don’t pay Capital Gains and Income Tax on any gains or income.
- Saving in a pension plan allows you to take advantage of a 20% tax relief offered by the Government. So for every £200 you pay, £250 is actually invested into the plan.
- The value of the investments that make up your child’s pension pot can fall as well as rise, and is not guaranteed.
- The child takes ownership of the plan at on their 18th birthday but the money will be locked up until they take their benefits, which can be any time from age 55.
These are just some of the ways you can invest in your children’s future. Whichever way you take, the best time to start investing is now to allow the investment the maximum time to grow. Also, invest as much as you can afford and involve your children in the process so they learn about these financial products and to get them into the savings habit.
Disclosure: This is a featured post.