Investing for your children

If you have read my blog for long enough now, you will know that I like to start off with a story.

When I was 16, my father gave me £2,000 to invest.  The money was really his but it was up to me to find the stocks to invest in.  

So off I went, into the back of the Daily Mail (don’t judge me).  Towards the back of the Daily Mail in the Business section, are a number of different share prices and companies with some brief performance figures.  I had made my mind up that I was going to put £200 into 10 shares, not a great decision in hindsight as I didn’t think about dealing costs on each share!

I watched these shares every day, I was hooked by the stock market.  

Long story short, some went down and a couple performed very well as this was 1999/2000 in the period before the Tech crash.  My big winner was Tadpole Technology which went up 10x before my father sold all the shares and pocketed the cash.  

From then on, I was fascinated by money, I have always been a good saver since that experience and I am fairly good at living within my means, which you would expect from a financial adviser.  I think the point was though, was that I was empowered to make financial decisions from an early age, a skill that helps me now in my mid 30s and beyond.

Why are you telling me this Adam?

I think the learning I took from this was the fact that my parents decided to educate me about money and finance.  

Back then, it was fairly rare for people to setup investments for children but this is now a standard recommendation I make to most of my clients with children

This is where I usually start:

Junior ISAs

You can put £4,128 into a Junior ISA for each child in a tax year.

You can get the specifics here

I am a big fan of Junior ISAs.  Both my children have them and I fully intend that at 16 they will have access to make investment decisions with their capital.  They cannot access the money until 18, but I am confident that as a parent I should be able to educate them around money and investment decisions.  For the record, my children’s Junior ISAs are both invested in stocks and shares in low cost index tracker. Over a long time period – costs matter.

Also, anyone can contribute into a Junior ISA once it is setup by the Parent or Guardian so grandparents could maybe fund some or all of it.  A great way of passing money to the future generations for things like university, houses and business ventures.

If your child was born in the Child Trust Fund era (2002-2011), these can now be moved into Junior ISAs and probably should be as the costs and investment offerings will generally be better.

Pensions for children

Also, a nice way of saving for your children’s future.  If like me, you assume that the State Pension won’t last forever, then contributions into pensions for your children could help their retirement.  You can also contribute £2,880 in a tax year and this gets rounded up to £3,600 by the Government and the growth is free of tax and could be for a number of years.  An early contribution into a child’s pension could be a serious amount of money further down the line thanks to compound return and they also can make investment decisions with the pension when they come of age.

Read more about the benefits here .

I would generally recommend Junior ISAs first and then pensions for children if parents of grandparents have spare income or money.

Trusts for Kids (Don’t misunderstand this as Child Trust Funds)

I am not a huge fan of Trusts for children although they hold a place for more complex estate and financial situations.

The main type of Trusts for children are called Bare and Discretionary Trusts and you find a fairly good summary here.

The main point about Trusts are that they can be complex and expensive and generally you are better looking at the two options above first.  

Many wealthy grandparent’s setup Trusts for their legacy and this can make sense but this is highly complex area where good advice is always needed. Many Trusts were setup before HMRC decided to alter a lot of the rules regarding trusts, so always good to get them checked as still fit for purpose.

Summary

In brief, investing now can give your children some financial safety and also give a pot of money that you can start to educate them with when they get to 16 and beyond.  I think in a world that is forever throwing poor information about money, greed and returns at us, it would be prudent to start the process as early as possible if you have spare money once you have paid for your desired lifestyle.  You cannot underestimate the power of compound returns over time and also the flexibility that a children’s investment will give you further down the line.