How to best invest for your child’s future
Make sure you maximise tax-free saving for your newest addition
THE Royal parents may have few financial woes, but the cost of raising a child for most extends far beyond nappies or baby food. The current average cost of a wedding is £18,244, the average first-time buyer deposit is £26,956, and student debt for 2013 university freshers could rise beyond £50,000. So how best can parents save for their child’s future?
TAX-FREE INVESTING
A Junior individual savings account (Jisa) should be your first port of call. They share the benefits of an adult Isa, providing a tax wrapper free from capital gains or income tax. A key advantage is that anyone can pay into it, so it’s a good way for grandparents to contribute to a grandchild’s savings.
With 18 years until your child gets access, funds can be selected through a Jisa on the basis of their long-term potential. Adrian Lowcock of Hargreaves Lansdown likes Cazenove UK Smaller Companies (which picks companies with “healthy cash flows”) and Aberdeen Asia Pacific (“markets in the region offer a diverse array of enterprising companies with good growth prospects”). But parents be warned: once your child turns 18, they will have complete freedom to spend their Isa. If the maximum was paid in every year from birth, with a 5 per cent growth rate, it could be worth £112,711 by the time they’ve completed their A-levels – a hefty sum for a reckless teenager.
RETIREMENT PLANNING
You may not think to set up a pension for your child before they have even learnt to walk, but it will both help with their retirement planning and help you avoid inheritance tax (IHT). Up to £2,880 can be directly invested annually into a junior self-invested personal pension for children up to 18, with a 20 per cent basic rate tax relief on all contributions bringing the total amount up to £3,600. The disadvantage is that your child won’t be able to touch the money until they reach 55. But if you want to gift your children a secure retirement – Fidelity found that if you invest £3,600 at birth, it could grow to £127,500 over 65 years assuming a 5.5 per cent growth rate – this is a good option.
RISK-FREE OPTIONS
A popular alternative are Children’s Bonds. Because they are offered by National Savings & Investments (NS&I), they are backed by the government, meaning your money is secure. You can invest £25 to £3,000, and interest (currently at a fixed-rate of 2.5 per cent AER for five years) is tax-free for the child and parents. They’re a popular choice for the low-risk investor, but they won’t offer the potential growth seen by their tax-free counterparts. Similarly, NS&I premium bonds will give you security, but instead of paying interest (they offer a comparable interest rate of 1.3 per cent), they hold monthly prize draws with a range of prizes including a £1m jackpot. But you may see no growth on your investment, and the number of prizes awarded will be cut from 1 August 2013.
THE ALTERNATIVES
Outside the tax wrapper, you can hold a Unit Trust or Investment Trust on behalf of your child using a bare trust. They offer one of the simplest and potentially tax efficient ways to save and invest for school fees planning (see right). But Lowcock warns that, while the first £100 of income is tax free, after that it is taxable at the parents’ rate of income. “Grandparents, however, can invest in unlimited amounts, subject to the IHT gifting allowance,” he adds.
The timeless advice for sensible investing applies even when it’s your child’s future you’re planning for. Regular saving is a good discipline, and will take away the emotional aspect of investing. And parents should start saving early, to maximise the power of compounding.