Investing For Your Child’s Future
This week’s Mortgages, Money and More podcast episode is all about investing for your children’s future. Craig Skelton looks at the options you have when you’re looking to invest for your children’s future with Financial Advisor, Jamie Benn.
Some recent research by Civitas suggested that a quarter, 25% of all twenty to thirty-four year olds are still living at home with their parents. I think the figure was a million more than two decades ago.
There are all the issues with housing and there are options for the bank of Mum and Dad or grandparents, which is a massive thing now for helping people get onto the property ladder. That’s okay for people right now, that’s obviously something that you can look to do now, but what can you do before that? My child is nowhere near the twenty to thirty-four age range, so how can I prepare to help them in the future?
We’re not asking anybody to have a crystal ball, but I think one thing that is always a key principle is that the earlier you start saving, the more chances you’ve got. There isn’t a set in stone figure that we suggest you save every month until age eighteen, but if you can give yourself the best chance and start as early as possible, we have more options than we would do if you do nothing when it comes to helping them as adults.
The same as the right time to start a pension, today is the easiest answer. The earlier you start saving, the better the returns. It’s so important to get the right professional advice when you’re looking at doing this sort of thing, because it’s okay doing something now, but if that’s the wrong path, the results can have a counter effect really.
With all investments we always look at a minimum of five years, but an average of ten or more. If we’re look at the first year of your child’s life, they’re not going to even considering accessing funds until they are eighteen, so that’s eighteen years where you can either choose to maximise your returns and take advice or you can take the risk of potentially not utilising that time effectively and being a little bit further behind.
What are the main investment options for clients?
There are a couple of different funds you can look at, usually a collective fund, and also investment bonds are often utilised, so they’re probably a bit more mainstream for adult investors. We’ve then got Junior ISAs, which you can use. NS&I has got specific products for children, and depending on the tax situation, you can also look at personal pensions as well. So it’s quite a wide range of different products and they do offer very different attributes alongside them as well.
What’s the Collective Fund?
A collective fund is basically where we’re entering a larger portfolio. So if we had £100 that we wanted to invest, we’re going into a fund that might be £10,000 that we put £100 towards. That means that we have a proportion of that fund and therefore we can diversify a lot further with £10,000 than we could do with £100. So that’s a way of helping you spread and mitigate risk and get things going as much as possible.
What are Investment Bonds?
Investment bonds are very similar, but they often use collective funds as part of it, using a slightly different tax treatment. So any potential trusts that were stuck in the background before can be utilised and can be kept or placed in a trust as part of the investment bond. It depends on the parents’ position and how much and how they pay tax already.
What is a Junior ISA?
Most people will have heard of ISAs before and a junior ISA is exactly the same, it’s just a slightly different amount that you can consider. This current tax year it’s £9,000 (At the time of recording in August 2022), that you can put into a junior ISA over the course of the twelve month tax year. This means that you can also inherit the full tax free allowance and that will carry forward for them. So it will always remain in tax free funds as long as it remains in the ISA. If your child is slightly older, they can also have a cash out by age sixteen or seventeen, which opens up the amount we can invest further, pushing the limit up to £20,000 this year as well.
For those with higher incomes, tax efficiency can be a real big saving in their pocket too. So it’s always something we’ve got to consider if it’s not used already.
What is the NS&I (National Savings & Investments)
They offer quite a few different products when it comes to children. Obviously one of the most famous products they offer is Premium Bonds, which is also available for children as well. They also do their own ISA, junior ISA through NS&I too. Alongside that you’ll find that anything that’s going to be offered with any type of government incentive is often done through the NS&I, for kids especially.
You’ve got those three products that you can access straight away, plus a revolving door of products that they often open and close, depending on the time of year, which are usually more of a fixed interest situation.
How does a personal pension work from a child’s point of view?
It’s very rare that I’ve spoken to somebody that knows we can do personal pensions. So you’re limited to your contributions, but there’s no minimum wage for a pension, so we can contribute up to just over three and a half years. Again, it would depend on the situation of the parent, but the pension is another form of tax allowance that we can use to our benefit and it’s about trying to utilise all the tax wrappers that we can.
Building up a pension is a great start for a child coming up to employment and obviously having that knowledge and understanding the importance of it. To pay that £3,600 consistently until they’re eighteen is going to give them a fantastic start to a pension.
What are the next steps?
That provides a brief overview of what options are, but taking advice is highly recommended to maximise your gains. You can set up a junior ISA yourself and just start paying into it, but when you look at the stats, the average First Time Buyer needs £61,000 deposit for a home. That does fluctuate up and down the country, because when you look at the northeast of England, just 14% of twenty to thirty-four year olds are living at home, but in London, it’s 41%, which is a massive number.
It’s just so important to speak to a financial advisor to understand what the options are, which products are suitable, because it could be that what suits one parent won’t suit the next. From a stress and time point of view and any concern about performance of the fund, the advantages of seeking professional advice for long term investments is obvious.