MoneyMagpie

Dec 14

How best to invest for your children

Updated 31/1/13

You might be wondering how you can possibly invest for your children now. Don’t panic! Child Trust Funds weren’t the most money-effective way to save for your children. We’ve got some better options for you here.

This is our guide to saving and making money for your children to make sure that they have a glittering future ahead of them – glittering with gold!

Junior Isa

Previously, one of the best ways to invest for your children was in the form of a Child Trust Fund. However, the Government scrapped this from the start of 2011 and instead launched its replacement, the Junior ISA in November 2011.

The new account bears many similarities to the Child Trust Fund, but will have no government contributions. The Junior ISA also has an increased yearly tax-free contribution limit of £4,128 – three times as much as the previous Child Trust Fund cap.

Leading children’s savings providers who had previously dominated the Child Trust Fund market, such as Family Investments, have been the first on board to offer the new Junior ISA. Also, as with many Child Trust Fund deals previously, there are freebies for parents opting to open a Family Investment Junior ISA – up to £20 worth of Boots vouchers. Jump Savings and Shepherds Friendly may also offer redeemable vouchers for parents applying for their Stocks and Shares Junior ISAs.

Check out this comparison table for some of the best Junior ISA deals out there.

Savings Accounts

You can also put money into a savings account for your child, but obviously you’ll want to get a good rate of interest. Currently Halifax Children’s Regular Saver offers an excellent 6% AER, and you can see more great children’s accounts in our article on the best savings accounts. In most cases, your children can get the interest on their savings tax-free.

The NS&I (National Savings and Investments) offers Children’s Bonus Bonds for children under 16. They offer a fixed rate of 2.5% AER and are tax-free, plus you’ll get a 5th anniversary bonus. See the NS&I website for more details and how to apply.

NS&I offers premium bonds as well. These don’t pay interest, but instead your bond is entered into a monthly prize draw with the chance to win one of millions of tax-free cash prizes. Anyone can buy these for a child and the prizes are directly sent to their parent or guardian.

This is a good way for, say, grandparents to earn some money for the grandchildren while avoiding the more typically risky paths of investment, like investing in stocks.

However, we don’t think savings accounts are the best way of investing for your children. Yes, your money is safe, but in the long-term you can make a lot more  for yor children with other investments.

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Stock Market

The stock market might seem like a frightening way to invest money. Are history GCSE lessons about the Wall Street Crash and the like flooding back to you and ringing alarm bells? Don’t write off the idea of investing in the stock market.

You are right to be cautious, but it can still be a very effective way of saving and making money for your children if you go about it in a sensible way.

We recommend index-tracking funds (‘trackers’). These are an easy and relatively cheap way of investing in the stock market. Tracker funds ‘track’ an index, or section of the stock market.

These sections can be based on anything: the size of companies, the specific industry of the companies, the products that are sold etc. The companies that fall within the bracket you have chosen, form an index. The tracker fund invests in all the companies in the index. If that index grows, you will get a piece of that growth.

You can buy a tracker fund on behalf of your child. Legal and General have a selection of tracker funds, so take a look at their site.

While there have been crashes and dips in the stock market (thank you history GCSE), its overall trend is one of increase. As long as you leave your money in the fund, and don’t depend on taking your investment out at a specific point in time, your fund is almost guaranteed to grow.

Handy tip: a good index to consider is FTSE 100, which is the top 100 shares in the stock exchange. Have a look at our investment section for more guidance on how to invest your money wisely, and check out our feature on these index-tracking funds.

Pensions

This might appear to be a ridiculous way of saving for your child, as it is probably nigh on impossible to imagine their retirement! However, this is actually a very savvy way of saving and making some money for your child in the long-distant future.

Any UK resident under 75 can have a stakeholder pension, this includes infants! What’s more, as they are private pensions, your children can start claiming their pension once they are 55.

At the moment men can only start claiming their state pensions when they have reached 65, and the age for women is gradually being raised to this as well, with further increases planned for the future. See the state age pension calculator to work out the age you are entitled to a state pension.

The maximum you can put into a stakeholder pension each year is £2,880. The government will then add in the tax that you would have paid on that money: making the total £3,600 a year. If you pay the maximum amount into their stakeholder for the first fifteen years of your child’s life, you would probably sort out their pension needs for them because of the time the money will have to grow.

Have a look at our article on stakeholder pensions or our article on child-specific stakeholder pensions to find out more.

Wine

Buying a child alcohol might seem odd. But actually it’s a very good investment. We don’t mean you should present your infant with a bottle of bubbly but you could buy a case of vintage port from a quality wine merchant for them to access in the future.

Your child can later sell the vintage on for a handsome profit. Alcohol is considered something called a ‘wasting asset’ so they won’t even have to pay Capital Gains Tax on the profit that is made.

Investing in port is limited in what it can do: it’s unlikely to make you millions. But in the past, fine wines have appreciated around 12% per year, so it’s still a good earner. And, let’s face it, it’s also a fun gift!

To learn about new trends in the wine market and find out about vintage ports, go to the Sunday Times Wine Club or have a browse of Vintage Wine Gifts.

Gold

Investing in gold for your child is another option. In the last few years, gold has made excellent returns: In the last five years alone, the value of gold has increased by 115%!

Obviously gold cannot be made from scratch so there is only ever a certain amount, which means it is not affected by inflation and devaluation in the same way that paper money is. However, gold isn’t like a stock or bond: it doesn’t offer income in the form of interest (from savings accounts) or dividends (what you get from shares).

Gold is rather a ‘store of value’. It is an alternative currency that is appealing because it’s not going to lose its value like paper money can. In recent times, yes, the value of gold has increased, but buying gold is most often used as a bedrock of wealth rather than as an investment to make money.

The Gold Bars Worldwide Website offers a guide to buying gold for beginners. Also have a look at our article on how to invest in gold to find out more.

Forests

Why not buy a forest for your child?! As mad as this might sound, it is a very effective means of generating money and you are doing your bit to save the planet. Perfect.

You would have to buy something classed as a ‘commercial forest’. This is woodland from where the timber is being marketed and sold. For a commercial forest, there are excellent advantages:

  • income on the timber sale is free from income tax
  • the rise in value of the trees is free from capital gains tax
  • once you have owned it for two years the forest is free from inheritance tax

This is a long-term investment. You must be prepared to wait for the time it takes for your trees to grow and be ready for use as timber, before the whole process starts over again. However, as a long-term investment, it is a very good one!

The government is actively promoting energy production from sustainable, renewable sources: electricity suppliers have to use a set percentage of renewables. The faster-growing woods are renewable.

Of course you don’t need to buy a whole forest – that can get a bit pricey. As a cheaper alternative, you can buy a share of a forest. Have a look at Forestry Investment Management, which offers both options. The UK Forestry Commission website will give you more information about the sustainability and uses of timber.

In conclusion…

Browse our section on investing for children for other features and follow the links in this article for more specific features on the options available to you. Also remember that Junior ISAs are now in force, so you can look into one of those as another alternative.

Most importantly, remember not to panic about the scrapping of CTFs. There are many good ways to invest for your children. Unless you have large amounts of disposable income, we strongly recommend putting aside small but regular amounts for them in the ways explained above rather than large but irregular sums. This way, you do not feel the financial hit too hard but your children will still come to reap the benefits.

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