Building savings for children is a common aim for parents, although many find that they never get around to doing it properly, and they miss out on the benefits of investing over the long term. You may have questions such as should you save cash, or should you invest? How can you ensure you are making good decisions on your child’s behalf?
In this guide, our financial planning team here at Vesta Wealth outlines how parents can build wealth for their children. We look at some account types to consider, showing examples of where investing beats cash and how to invest wisely over an 18-year period.
Account types for children
Many parents simply open a new account with their bank and commit some money each month to save for their child. However, interest rates on most deposit accounts are currently very low; even the best fixed-rate accounts do not beat the target rate of inflation set by the Bank of England, which means that the savings would lose purchasing power over the years leading up to your child’s 18th birthday.
A good option is to consider a Junior ISA. The best could pay 2.5% interest rate, which beats the Bank of England’s 2% inflation target.
If you are looking to lock money away for the very long term, you could help start building wealth for their future retirement, using a Junior SIPP (self-invested personal pension). Whilst you can only put £3,600 into it per tax year (as opposed to £9,000 for a Junior ISA), the government will top-up the contributions with tax relief at the rate of 20%, meaning a £2,880 net contribution receives £720 from the government, which together makes up the full £3,600 allowance.
Cash versus investing
Many parents are nervous about investing for their child out of fear that they may lose money. It is important to remember that saving cash in the bank is not risk-free. For example, if inflation was to rise above the 2% Bank of England target to, say, 4% in certain years, then the money would make a real terms loss under current cash Junior ISA rates. Also, by not investing the money, your child may be missing out on some significant growth over the long term. The S&P 500 (which tracks the 500 biggest US-based companies), for instance, has averaged a 10% return each year since the 1920s.
Of course, the risk of one or more stock market crashes at some point during an 18 year period is real. Here, it can be very helpful to speak to your financial planner about how to mitigate the risk to your child’s investments as they near the date when they might want to start accessing the funds. One idea is to start de-risking the investments in the years nearing their 18th birthday – for instance, by moving more of it into lower-risk investments. That way, if there is a market crash during these years the impact should be limited, requiring less time to wait for the portfolio to recover.
Tips on investing for a child
It has never been easier to start investing, but it is also easy to make costly mistakes without a strategy and help from an experienced financial planner, to help guide your decision-making. To get you started, below, we have compiled a list of tips to consider as you weigh up the various options before you:
- Learn about basic investing concepts. Even if you have some experience with investing it is important to have a good grasp of some of the key terms you need to know. These include jargon such as equities, bonds, funds, and ETFs. This will help you get more out of your research and discussions with your financial planner.
- Watch out for fees. Investing comes with various costs that are easy to miss, eroding your child’s real returns. Investment funds, for instance, charge an annual management fee. Those which are actively managed are likely to be more expensive than passive funds and may not always come with better performance.
- Diversify the investments. Putting all of your child’s money into one company’s shares would, of course, be foolish. If that business became insolvent, then all of the money could be lost. However, it is also important not to simply concentrate on one fund, market or country. Spreading out across multiple opportunities helps to reduce risks associated with each one. This is called diversification.
- Put your risk appetite in perspective. You may be comfortable with your own tolerative for investment risk, but when considering investing for a child you need to consider their position, not being overly cautious or aggressive with the investments, taking into account the fact that you may well have a different investment horizon ahead of you. If you have an older child, they may need access to the savings in a relatively short period, but a very young child may not need access to their funds for at least 18 years. A financial planner can help you sift through these complicated matters and find a suitable strategy which suits your child and which you are comfortable with.
Invitation
If you would like to discuss your financial plan and retirement strategy, then we would love to hear from you. Get in touch with your Financial Planner here at Vesta Wealth in Cumbria, Teesside and across the North of England.
Reach us via:
t: 01228 210 137
This content is for information purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult your Financial Planner here at Vesta Wealth in Cumbria, Teesside and across the North of England.