The cost of bringing up children is considerable enough, without thinking about saving for their future as well.
However, even small sums put aside early on in a child’s life can make a huge difference.
As the Junior Isa celebrates its tenth anniversary, we look at the most efficient ways to save for children and grandchildren to make sure every penny saved goes a long way.
Many happy returns: Even small sums put aside early on in a child’s life can make a huge difference
FROM SIDESHOW TO A FINANCIAL BEDROCK
Ten years since the Junior Isa (which stands for Individual Savings Account) was launched, the savings vehicle for children has never been more popular.
More than one million plans were paid into last year, thanks to parents and grandparents setting up nest eggs for children’s futures.
‘Junior Isas have gone from a relative sideshow to an important bedrock of financial planning,’ says Holly Mackay, chief executive of financial website Boring Money.
They function in a similar way to adult Isas. No tax is paid on any of the money put into or accrued in a Junior Isa, which makes it an extremely tax efficient way to save. However, Junior Isas differ from adult Isas as they can only be accessed when the child turns 18 – and the maximum that can be paid in is £9,000 per tax year instead of £20,000 for adults.
While the account can only be opened by a parent or guardian, anyone can pay in.
Of course, it is possible to build up a nest egg for a child in a normal savings account. However, to turbo-boost savings and investments, Junior Isas are usually a superior product.
‘They have a clear advantage as there is no tax to pay on interest or investment returns earned – a perk which adds up significantly over 18 years,’ says Annabelle Williams, personal finance specialist at robo-adviser Nutmeg.
So, no income tax and no capital gains tax.
WHY STOCKS AND SHARES ARE BETTER INVESTMENT
Much like with Isas for adults, there are two types of Junior Isa: cash and stocks and shares.
Cash Junior Isas are by far the most popular: constituting 69 per cent of Junior Isas opened last year.
However, experts warn that these are missing out on huge opportunities to grow their wealth. ‘I would go as far to say that cash Junior Isas are completely and utterly pointless,’ says Jason Hollands, managing director of wealth platform BestInvest, part of Tilney.
‘Cash isn’t a suitable home for time periods of up to 18 years, as the real value will be eroded by inflation, which is, of course, on the rise again.’ Last week, inflation hit 4.2 per cent.
Figures from wealth manager AJ Bell reveal why stocks and shares Junior Isas are likely to be a better alternative than cash. The wealth platform found that if £100 was put into a child’s Junior Isa every month for the last ten years, and it was invested in an index of leading UK companies, the pot would now be worth £16,316.
But, if the same amount was put into a cash Junior Isa earning a typical one per cent, the pot would be worth £12,680. In other words saving into a stocks and shares account would have earned £3,636 more than a cash equivalent.
TAKE A RISK IF INVESTING OVER THE LONG TERM
It may feel counter-intuitive to take financial risk with the nest egg of a child. After all, it’s hard-earned savings that could help with future university fees, for example, or a deposit on a new home.
However, if the money will be left untouched for a number of years, it is generally more prudent to take a good amount of financial risk. That will give the best chance of strong investment returns – and time enough to make up any losses as a result of market dips.
The longer you have until the money is needed, the more risk you can take, recommends Juliet Schooling-Latter, head of research at fund research group FundCalibre.
‘For those investing for young children, we always suggest higher risk investment areas such as smaller companies and emerging markets, as there is plenty of time to ride out the highs and lows and potentially get very strong returns over a ten to 18-year time horizon,’ she says.
Schooling-Latter likes investment trust BMO Global Smaller Companies and fund FSSA Global Emerging Markets Focus. These have both turned £100 into £132 over the last three years.
James Carthew, head of fund information group QuotedData, invested for his nieces and chose a simple single-fund strategy. ‘I started saving regular amounts each month in stock market-listed investment trust Alliance and handed over to the girls the lump sum that had built up just after heir 18th birthdays,’ he recalls. ‘By saving monthly, I would welcome rather than fret over those months when the share price dipped and I bought more shares for the pot.’ Alliance Trust has generated a return of 55 per cent over the past three years.
Dzmitry Lipski, head of funds research at wealth platform Interactive Investor, suggests that today’s climate-conscious youngsters might be keen on a Jisa built around an ethical fund.
He highlights Montanaro Better World, a specialist ethical option aimed at helping to solve some of the world’s major challenges by supporting the United Nations Sustainable Development Goals. The company has large holdings in biotech and healthcare, and has turned £100 into £206 over the past three years.
Investing in high-risk investment funds is fine when your child is three or five, but as they approach their late teens, you may understandably become nervous about stock market volatility, especially if the money is earmarked for a specific cost such as university fees or a house deposit. ‘As the child approaches the date when they may wish to access the funds – perhaps 18 – it is wise to reassess the investment approach, potentially reducing equity exposure and introducing less volatile asset classes into the mix,’ says Hollands.
He suggests that less risky picks include Personal Assets Trust, which has turned £100 into £131 in the last three years. Personal Assets, run by Troy Asset Management, invests in a range of assets including bonds, gold and equities.
Other suggestions include Rathbone Global Opportunities, which FundCalibre’s Schooling-Latter describes as ‘a still dynamic fund but a little less volatile than rivals’. It has produced an investment return of 91 per cent over the past three years.
THE ALTERNATIVES TO A JUNIOR ISA
Your own Isa allowance
Some parents and grandparents may not feel that an 18-year-old is ready to take responsibility for their Junior Isa when it matures. In this case, they could consider using some of their own Isa allowance to save for the young person instead, assuming they are not already using the full £20,000 allowance for themselves.
A bare trust
Grandparents can also use a bare trust, which is a legal arrangement where money is held by grandparents for the benefit of grandchildren.
The money can then be used for the child’s benefit before the age of 18 – for example, for music lessons or school fees – but the child takes control of the money when they turn 18.
Grandparents can find that trusts are tax efficient as any income taken from them is treated as the child’s rather than their own. The same benefit does not apply to parents.
If you do not want a child to have control of their savings at 18, you can set up a pension for them that they will not be able to access until their late 50s at the earliest.
You can invest £2,880 each year into a child’s pension, and the Government will top this up with tax relief to £3,600. Thanks to the miracle of compounding over time, this early investment could be extremely valuable for a child in the future.