5 min read

Kids savings accounts to invest in your child’s future

Most parents want to give a nest egg to their children. Whether it’s used to put down a deposit on a house, buy their first car or pay for university education, by starting early parents can build up significant sums for their kids.

A girl putting coins into three jars labelled education, savings and toys

While saving for children often conjures images of piggy banks and loose change, investing could deliver much higher returns than cash savings over the long term. Investing doesn’t mean you need in-depth knowledge of the stock market, you can invest in ‘funds’ which pool together investments in multiple companies and sectors.

This means you are not over exposed to one individual company or market. There are many types of fund, depending on how much risk you’re willing to take on, and the company which runs the fund decides what it invests in.

Here are some ideas on how you could help your child’s money grow.

Why invest instead of saving in cash?

Returns on cash savings accounts are at historically low levels. While savings accounts for children generally pay more than their adult counterparts, over a longer time period investments will typically offer higher returns.

The value of your investment could go down as well as up, and this means investing should always be viewed over the medium or long term. Investing when your children are young allows time for your cash to potentially grow and weather fluctuations in the economy.

How can I invest tax-efficiently?

When possible you want to ensure that your investment growth is not taxed.

A Junior ISA is one way to do this. Currently, these accounts are not subject to income tax or capital gains tax, meaning you don’t have to worry about your child’s investment being taxed.

You can invest up to £4,260 in the 2018/2019 tax year*. But if you do not use this allowance in the tax year then it is lost. While you may prefer to make deposits each month, you don’t have to. With a Junior ISA you can max out your allowance at any time, or make irregular payments. Your child can withdraw the funds from their Junior ISA when they turn 18.

Are there other investment options?

While a Junior ISA is the most tax efficient way to invest, you could choose to open up a standard investment account for your child if you prefer. There are no yearly limits which means this is an option for people who have maxed out their annual Junior ISA allowance.

Remember that with a Junior ISA your child will get full access to the account once they turn 18. If you’d prefer for your child not to have immediate access, you could also consider investing in your own Stocks and Shares ISA and then passing this on at a time of your choosing.

However, this will eat into your own annual allowances and your investment pot will lose its tax-free status when you pass it to your child.

What about cash savings?

Many people enjoy the simplicity of cash. There are a range of options available if you prefer to save for your children in this way. You can choose to save within the Junior ISA, subject to the same annual limits.

There are also a range of standard savings accounts on the market. While these do not enjoy the same tax-free status, many have no limits to the amount you can save. Your child is also unlikely to be paying tax on their savings income anyway.

Regular saver accounts – which let your drip feed a small amount of cash in every month – are also worth considering. But these often limit the amount you can save each month at £100.

How much could I invest?

You don’t need to have a large initial deposit to make investing worthwhile. Drip feeding money each month could better help your cash survive any financial turbulence in the markets. Although of course, there are never any guarantees.

Many parents would not be able to afford a large one-off lump sum, but can deposit smaller amounts on a regular basis. For example, you could add £25 or £50 to your child’s investment pot each month.

Over 18 years your money is likely to go through at least one financial downturn. But by regularly investing small amounts over a longer period it helps minimise the risk.

If you open a Junior ISA account for your child, once it’s active then anyone can pay in – including grandparents. Also, when your children are of school age, you can teach them about the value of money and how it can grow over time.

What investment strategy should I have?

Don’t feel you need to know the market inside out. Many people are scared of investing as they believe it’s difficult to understand, but there are a range of options depending on your level of knowledge.

Most providers will offer a range of funds, which contain a variety of investments. This helps minimise your risk to specific companies or sectors. You should pick a fund which matches your risk profile and financial circumstances.

But remember to check the fees that are charged by your provider as some are more expensive than others, and this can erode your long-term investment growth.

As always, do your research. And when in doubt, consult a professional financial adviser.

Written by Adam Williams – Financial Journalist

 

*Source: https://www.moneysavingexpert.com/savings/junior-isa/

Note: Whilst we take care to ensure Talking Finance content is accurate at the time of publication, individual circumstances can differ so please don’t rely on it when making financial decision. The opinions expressed within this blog are those of the author and not necessarily of OneFamily.