Todays post is a guest post from South Wales Financial Independence – and includes some great tips on investing for your children. This is not advice, but simply tips on what’s out there at the moment. As with anything financial, you should seek the advice of a qualified professional if you’re unsure.
So, Mark’s asked me to write a little something about saving/ investing for your children. It doesn’t matter at what stage you are at- planning your first child, toddler or teenager. It is never too late to setup some savings for them. As the old adage goes “The best time to plant a tree was 20 years ago. The second best time is now.”
So, if I know that I want to save something- what are my options?
Well, there are quite a few! Which is good- you just need to pick what is best for you.
Note about Cash v Stocks and Shares. “Cash is king” as they say, you know what its worth, you know what it can buy, and it doesn’t fluctuate up and down like Stocks/Shares. So, which should you use for your child? Well, that totally depends on what’s called your “risk profile”. If we consider the following:
There is a chance that you will get back less than you invest. Would you still put money in? Surely not. However, with this chance (or risk), there is also the chance that you will get back more than you put in- because you took this risk. This is basically Stock/Share investing- you take (some) risk and then share the reward. The longer you are willing to invest for, the higher the chance you will make money is. It’s often suggested that you need to invest for at least 5 years (and more like 10 years really), otherwise the chance of losing money is too high. If the idea of getting back less than you put in is uncomfortable, then Stocks/Shares aren’t for you!
So, hopefully you have now got some idea of Cash v Stocks/Shares, let’s look at the options for actually getting those savings setup:
Childrens Savings Accounts (Cash only)
Lots of these exist, and usually have teaser rates that only exist for a year etc. These are great if you want to save for a short time (think, under 5 years). You can also help show your child how the money grows, by sharing statements etc with them once they are old enough. Moneysavingexpert keeps a great list up to date with the best current offers. Just note, that you will need to keep an eye on the teaser rates and move the savings once the rate runs out.
Junior ISA’s (Cash & Stocks/Shares)
Hopefully you are aware of ISAs for your own savings- children get their own version, and it’s pretty good as well!. Since April 2020, you can now save up to £9,000 a year into a Junior ISA- whether it is cash or stocks & shares. Whilst most parents won’t be able to make full use of this it could be useful to have- especially if you are saving over a long period, say 15 years. Just note that this does lock money away until they are 18! This might be a good thing if you were previously saving in your own account and were using it for other things etc.
Why bother with Junior ISAs?
Well, basically because the government has a rule to stop parents from avoiding tax on their savings by putting them in the child’s name. So, any money from the parents- if the interest is over £100 in a year, then tax is taken at the parents tax rate. You can avoid this by using a junior ISA.
Junior SIPPs (Stocks/Shares)
Now, bare with me, because this is going to sound a bit insane. A pension pot for your child, are you crazy? Well, possible, but that’s another conversation. The government allows you to setup a pension (Junior SIPP) for your child. Not only that, but you can also get basic tax relief (20%) on it as well. What does that mean? Well, if you put £1,000 in, then the taxman will automatically top this up by £250. This is limited to £2,880 per year. Being a pension, it means that it cannot be withdrawn until your child is at least 57- so it’s a long time away!
Hopefully that has been helpful for helping you decide on investing for your children, and if you are still unsure- looks at the latest offers from the various banks, ask a friend, ask a professional for some advice (likely have to pay for this). Please note that none of the above is advice, and please do your own research.