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 investing for your children to make sure that they have a glittering future ahead of them – glittering with gold!
- Junior ISA
- Children’s Savings Accounts
- Stock Market Investments
- Pensions (Yes, really!)
The great thing about investing for your children now is that they won’t need the funds for several years. This means you can create a long-term investment plan for them to reap fantastic rewards.
Junior ISAs, launched in 2011, provide a tax-free savings avenue for under-18s. You can save up to £9,000 in the account each year from 6th April 2020. If you don’t use the allowance in one year, you can’t roll it over to the next.
A cash ISA provides returns in the form of interest paid on the savings. As the savings increase each year, you’ll see the annual payment gained from interest increase. For example, if you save the full £9,000 for 18 years – before your child can access the account – and the interest rate is static at 3%, you’ll end up with a pot worth around £215,000 – and £52,000 of that is pure interest. It’s easy to see how this fund can build a great money pot for your child when they turn 18!
The interest rate can change each year, so make sure you keep an eye on the market rates. If you find a better rate with another provider, it’s easy to transfer the Junior ISA.
A stocks and shares ISA invests your child’s savings into funds. The returns are not guaranteed, but can be much bigger than a cash ISA in the long-term. These investments can go down as well as up, so you could end up with less money than you’ve paid in.
Cash vs Equities JISAs
A cash ISA is free to set up and have; a stocks and shares ISA will have an annual management fee.
Your child can have one cash ISA and one stocks and shares ISA – but the maximum amount you can save between the two each year remains £4,368.
Your child controls their Junior ISA from the age of 16, but they can’t withdraw any money until they turn 18. At the age of 16, they can also open an adult cash ISA to take advantage of the £20,000 savings limit in addition to the Junior ISA limit.
The biggest advantage of Junior ISAs is that your child won’t pay tax on the savings when they become adults – and you won’t pay tax on them, either. If you’ve been squirreling money away into an adult account for your child’s future, you may have to pay tax on this – but put the same money into their Junior ISA and you won’t!
You can also open a savings account for your child which they can manage and withdraw cash from at the age of 7. This is obviously not the best long-term investment route – but it’s a great way to teach your child about money and savings.
Interest rates on savings accounts are lower than other investments. This is to reflect the fact your child can access their money with ease, instead of locking it away until they are 18 years old.
An instant access savings account lets you put in, and withdraw, money at any time. The interest rates are much lower – but it can be a great tool to help your child save for a short-term goal.
A regular savings account needs a monthly deposit and usually locks money into the account for 12 months. Your child can withdraw their money sooner but won’t get the benefit of the better interest rate if they do so.
Children’s savings accounts take advantage of the annual personal savings allowance prior to paying tax. If you’ve maxed out their Junior ISA allowance, for example, you can save a further £18,500 before paying tax on the interest payment. This amount is made up of the £5,000 savings allowance, £1,000 personal savings allowance, and £12,500 personal allowance – and could change from year to year.
NS&I offer premium bonds for children. This is a great way for grandparents, relatives, and friends to invest for your children as they can buy bonds as a gift.
NS&I bonds don’t pay interest. Instead, each bond is placed into a monthly draw to receive a cash prize. The more bonds a child has, the greater chance there is of winning. There’s no limit to how many times a premium bond holder can win a tax-free cash prize.
Children can withdraw their bonds to cash them in when they are 16 years old.
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 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’ a section of the stock market, so you don’t have to pick individual funds to invest in.
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. If it dips, you could lose money.
You can buy a tracker fund on behalf of your child.
While there have been crashes and dips in the stock market, the 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.
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 investing for your children.
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 start claiming their state pensions at the age of 65, and the age for women is gradually being raised to this as well. By October 2020, both men and women will have to be 66 before they can claim their state pension. 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. The money is locked away until retirement – so the longer it’s in the pension fund, the more time it has to grow.
You can continue to pay into your child’s pension when they’re an adult. Parental contributions get treated like the pension holder’s contributions. This means that, if your adult child becomes a higher rate tax payer, they can claim some tax relief on your contributions to their pension. So, as well as helping save for their future, you’ll also be giving them more disposable income right away.
Gold is another way to invest for your children. Unlike currencies, precious metals have a history of holding their value over time.
Gold cannot be made from scratch so there is only ever a certain amount. This means it is not affected by inflation and devaluation in the same way as paper money. 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. People choose to invest in gold because they can own a physical investment in an unstable financial market. If you own physical gold you can sell it when prices are high to see good returns on your initial investment.
You can buy gold either as physical bullion or sovereigns from the Royal Mint, or invest in an exchange-traded commodity (ETC) stock that tracks the price of gold. The owner of the gold stock has physical gold bullion and you’re buying a share of that gold. As the price goes up (or down), so does the value of your share.
Why not buy a forest for your child?! As mad as this might sound, it is a very effective means of generating money, provides added security of land ownership, and helps the environment. Perfect!
You’ll buy a ‘commercial forest’: woodland where the timber is sold. You don’t have to buy an entire forest! You can invest in a share of a forest to gain the benefits without a huge capital outlay on acres of woodland.
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 used as timber. It’s an ongoing investment: once a crop is sold, a new one is planted. However, as a long-term investment, it is a very good one!
The earlier you start investing for your children, the more opportunity there is for their savings to grow. Even small amounts each month quickly add up!
Browse our section on investing for children for more features about the options available to you.
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