Saving and investing for children – options and how to choose
We are all aware of the pressures on today’s young people, with parents increasingly stepping in as the ‘Bank of Mum and Dad’ to provide financing for everything from house deposits to driving lessons.
If you are a parent of young children though, you have one advantage when it comes to preparing for these costs, and that is time. Thanks to the magic of compounding over time, setting up the right investments and savings plan when your child is still small should allow you to support them when they get older without too much financial pain.
Here is how to get started.
1. Work out what you might need, and when you might need it
Having children is costly, and it can be difficult to save for your child’s future in the early years, when expenses come thick and fast. But when it comes to saving and investing, the money you put away long before it is needed has longer to grow, so even if you can put a little into children’s savings, you could find it becomes a lot.
The types of account and investment or savings strategy you choose for child savings and investment will depend on when you will need the money and the age of the child now.
For example, if you know you will need the money before the child turns 18, you should not lock the money away in an account such as a Junior ISA, which will only be accessible once the child becomes an adult. If your child is already 14 and you know you’ll need the money for university living costs, high-risk investments are a poor choice, as your money does not have time to ride out the volatility of the stock market and there’s a risk that you may not have as much as you hoped.
Mapping out some of the ages when your older children are likely to need money and the amount needed, can help you to plan. Some of these milestones include:
- Age 17, learning to drive. This costs an average of just over £1500 according to the RAC, although this amount is likely to rise with the cost of living crisis1. This figure also excludes the cost of buying and insuring a first car if your child is not using yours.
- Age 18, university. University costs can be eyewatering, and although your child can get a loan for ‘maintenance’ (living costs) as well as for tuition, this loan is means-tested on parental income, meaning that parents are expected to bridge the gap. According to Save the Student – experts on student finance- on average parents contribute on average £149.80 every month (around £5,500 over a three-year course. 2If you want your child to graduate debt-free you will have to save much more – English universities can charge up to £11,100 a year for undergraduate degrees, and the average student’s living costs are around £924 a month.3
- Age 30, buying a first home. The average age of a first-time buyer is now over 304, but you may wish to help your child onto the property ladder earlier, since it is far easier if parents can help with a house deposit. The average first-time buyer house deposit is now over £60,000, according to Halifax bank.5
2. Find the best wrapper for savings or investments
It is easy to feel confused about the various bank accounts, investment bonds and other products marketed at those trying to save for children.
If you have a long time before the money is needed, investing using a tax-efficient structure should help your child’s money to grow. These include Junior ISAs, which allow money to grow through either savings or investment without incurring tax. You can put £9,000 into a Junior ISA every year, and these can be transferred between stocks and shares and cash without losing their tax-free status. The child can take control of the account when they're 16, but cannot withdraw the money until they turn 18.
Alternatives include using your own ISA allowance (£20,000 a year) to save for your child, although this limits your own tax-free contributions, or saving into accounts such as Premium Bonds, where the current annual prize fund rate is 3.3 per cent. With premium bonds, any prizes you win are tax free, but there’s no guarantee that you’ll receive an equivalent of 3.3 per cent returns as the prize draw is random.
If grandparents are investing for their children, using a trust structure can be tax efficient. It is worth seeking legal advice if you are considering this, and it rarely works as well for parents due to tax avoidance legislation aimed at stopping parents shifting their tax burden onto children under 18.
Finally, you could consider a pension for your child if you have more money to put away and are thinking in a very longterm fashion, you can put money into a child’s pension and receive ‘free’ top up from the government. You can put up to £2,880 a year into a child’s pension and the Government will add ‘tax relief’ at 20 per cent to make this up to £3,600, even though there has been no tax paid on this money. The downside of this, of course, is that children can not access this money until their own old age, although it does give them a huge head start on retirement savings and the money will certainly have plenty of time to grow.
3. Maximise your returns
One of the biggest questions when putting money away for children is whether you should save or invest.
The best choice for you will depend on how long before you need the money and your own risk appetite, as well as your current income.
Studies such as the Barclays Equity Gilt Study show that over long time periods, investment usually outperforms saving, though it is important to choose investments that align with your own risk tolerance, are appropriately diversified and are regularly reviewed.
If you are risk averse or have only a few years before the money is needed, you will want a safe option. Some savings accounts for children have relatively high interest rates, while premium bonds are also risk free and tax free.
If you have longer, and want to invest, you can either take a DIY approach, picking funds and shares, or use an automated services that will pick portfolios for you. Or an independent financial adviser (IFA) can help ensure that you have a diversified portfolio that matches your risk appetite and goals. Whichever you choose, you will want to renew it regularly.
4. Get started early
When it comes to saving or investing, little, early and often is a great strategy to help your money to grow. If you can automate savings into your children’s accounts so much the better, as you won’t notice the money going out each month, but the total will build up. This is even more important if you’re investing rather than saving, since you will smooth out inevitable stock market volatility by continuing to invest whether the market is up or down.
5. Educate your children!
The final plank of a successful child saving strategy is ensuring your children are ready to receive the money you are getting ready for them! Teaching them about saving, spending and investing will help to ensure that they do the most possible with your gifts and are best set up for the future.
Resources from Young Money (https://www.young-enterprise.org.uk/teachers-hub/financial-education/) can help anyone wanting to teach the young about personal finance, while even those of us who have been saving and investing for a long time may learn something along the way.
4th April 2023