The piggybank: Giving your child a financial head start this tax year
With eye-watering university fees and spiralling house prices to contend with, you might think you need to be a millionaire to give your child a financial head start in life. Yet investing relatively small amounts of money into a Junior ISA each month could put your child on the path to a more secure future.
The new tax year began on 6 April, marking the ideal time to kick start your children’s savings. Read on to find out why it pays to begin investing early, with some tips on how to get started.
Time is on your side
The great thing about investing for a child is that time is on your side. You can open a Junior ISA from birth and your child can’t access the money until they reach their 18th birthday. That’s 18 years over which your child’s investments can benefit from stock market growth. As with adult ISAs, investment returns are tax-free.
Investing over long periods of time lets you harness the full power of compounding. This is where you earn a return on your initial capital as well as on the returns themselves. Even small amounts of money can grow into a sizeable sum over time.
The power of investing
If you invested £600 every year – the equivalent of just £50 per month – from birth until your child reached age 18, they could amass a pot worth £17,723, assuming a return of 5% after charges. Of this amount, £6,923 would have been generated by investment growth. If you were able to double your investment to £1,200 per year, or £100 per month, your child could have an even more substantial £35,447, with £13,847 of that generated by investment growth.
Bear in mind that these examples are for illustrative purposes only. The stock market goes down as well as up, and you may get back less than you invested. However, history shows that, over periods of ten or more years, the stock market tends to perform more strongly than cash and rise above the rate of inflation.
Why beating inflation matters
Some parents are worried about taking risks with their child’s money. Yet keeping it as cash isn’t necessarily as risk-free as you might think. Interest rates on cash savings accounts and cash ISAs are very low and, in many cases, below the rate of inflation – that’s the rate at which the price of goods and services is increasing.
If your child’s money isn’t keeping up with inflation, then its real value will decline over time. As an example, the Bank of England’s inflation calculator shows that goods and services that had cost £50 in 2002 would actually cost £83.18 in 20201. During this period, the inflation rate averaged 2.9% a year.
To give your child’s money the opportunity to grow at or above the inflation rate, you will need exposure to the stock market. Investing across a range of asset classes and sectors can help to cushion the impact of any particular asset falling in value.
How to get started
Only parents or legal guardians can open a Junior ISA on behalf of a child, but anyone can pay in money. Grandparents, godparents, aunts, uncles and friends could all help to contribute to your child’s financial future – so long as this doesn’t exceed the annual allowance, which is £9,000 for the 2021/22 tax year.
If you received some money when your child was born and it’s still sitting in your bank account, putting it into a Junior ISA could be a great first step. For children who already have a Child Trust Fund (CTF), you would need to transfer its contents into a Junior ISA and then close the CTF before you can make Junior ISA contributions.
Opening a Junior ISA is very simple, especially if you opt for one of Brewin Dolphin’s ‘ready-made’ investment portfolios. These contain a diverse spread of risk-controlled assets, which means you don’t need to worry about choosing and managing individual investments. Our portfolios are designed to deliver growth over the long term, while managing investment risk.
Read more at www.brewin.co.uk
1 www.bankofengland.co.uk/monetary-policy/inflation/inflation-calculator
The value of investments can fall and you may get back less than you invested. Tax treatment depends on the individual circumstances of each client and may be subject to change in the future. Neither simulated nor actual past performance are reliable indicators of future performance. Information is provided only as an example and is not a recommendation to pursue a particular strategy. Information contained in this document is believed to be reliable and accurate, but without further investigation cannot be warranted as to accuracy or completeness. Opinions expressed in this publication are not necessarily the views held throughout Brewin Dolphin Ltd.