If you want to invest for your children, it’s a lot easier than it used to be. There are many more children’s investments to choose from and with some the government gives you extra cash to put in them! Oh, and see our other article on investing for children here for more ideas.
- Junior ISAs
- Stakeholder pensions
- Junior SIPPs
- Index-tracking funds
- Premium Bonds
- Gold and silver
- Children’s savings accounts
- What to avoid
Your first port of call should be our great article here explaining what Junior ISAs are and how they work.
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 £4,128 into a Junior ISA for your child or grandchild. The Junior ISA is held in the child’s name and money can be withdrawn when they turn 18. The money could be used to offset the costs of university fees or towards the deposit for a new home or simply to give them a good start in life. Junior ISAs have the same tax benefits as adult ISAs – 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.
Like adult ISAs, there are two types of account:
Cash Junior ISAs
Children are only able to hold one Cash Junior ISA and one Stocks & Shares Junior ISA at any time up to to the overall contribution limit of £4,128 a year.
Stock & Shares Junior ISAs
The pros of Junior ISAs is that they are flexible and tax free. The cons are that your child might not spend that money wisely and, of course, you never know if your investment will perform as well as you’d hoped.
We like stakeholder pensions here at Moneymagpie. They’re cheap and easy to open.
Because they were set up originally to help people who weren’t working save for a pension it means that even babies can have a stakeholder pension, as we explain in this stakeholder pension article.
With stakeholders you (and the rest of the family) can put up to £2,880 per year into a pension for your little one and the government adds in the tax that would have been paid on it making it 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), thereby exempting it even if you die within seven years. This is one way of transferring money IHT-free to a child.
As with stakeholders, with a Junior SIPP (Self-invested Personal Pension) you can put a maximum of £2,880 into it for a child each year. The government will add £720 in tax relief, boosting it to £3,600. The investments then grow free of further UK income and capital gains tax. This is highly tax efficient and can provide a firm foundation for their retirement plans.
The IHT rules for Junior SIPPs are the same as for the stakeholders which is handy!
Save £300 a month from birth until age 18 into a good Junior SIPP and your child’s pension could be worth £1.03 million when they come to retire even if they make no further contributions (retiring aged 65, assuming a 5% annual return).
The pros of investing in a pension for your children are primarily the tax benefits but you could also take a view that it’s better for them not to have access to this money until they’re sensible enough to know what to do with it! The cons are that you may not be around when they come to benefit from the money. Also you should check that the money can be transferred to a nominated person if your child dies before they can take their pension.
We like index-trackers at Moneymagpie. Investing in the stock market has the potential to create much better returns than savings accounts long term although this is not guaranteed of course.
Index-trackers are one of the cheapest and easiest ways to invest in the stock market, as we explain in this article.
Individual shares and unit trusts cannot normally be bought directly by a child but 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.
Parents and grandparents can buy Premium Bonds on behalf of under-16s.
The minimum purchase is £100 worth of bonds and the maximum holding is £30,000. We’re not big fans of Premium Bonds. The average return on them is equivalent to a 1.5% tax-free interest rate. The odds of a single bond winning in any one month are 24,000 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 as an investment has done extremely well over the last ten years. Having traded at about $270 an ounce in 2001, it currently fetches about $1,450 (according to Goldprice.org). Of course, you have to factor in the exchange rate between sterling and dollars when you buy gold as the price is set in dollars.
You can buy gold or silver coins, bullion and even jewellery for your kids. Gold and silver coins and jewellery can become highly collectible. There are lots of other ways to invest in gold too as you can see in our ‘Investing in Gold’ article.
Some bank accounts are specifically designed for children. Generally the best ones are those that restrict access.
For example, Halifax’s Kid’s Regular Saver account pays 6% (fixed for a year).
We’re not too impressed by pretty much anything else that’s called a ‘Children’s fund’ or something like ‘Send your little darlings to university special growth fund’. These packaged-up, highly-marketed products (you can get them through your bank or other sales outlets) are usually overpriced and underperforming.
We would like to say that friendly societies do good products for investing for children but, again, they tend to have high charges and really don’t perform that well. They might have nice brochures but in the main they’re not worth it.