20 June 2021
James Bonarius, Chartered Financial Planner
I’m constantly asked by clients "what should I do to save for my children?" There is no right or wrong answer, but doing something surely is better than doing nothing. After all, our children hopefully have a long life ahead of them. This offers a significant investment time horizon to plan for the future.
Make your money grow with compound interest
Regular contributions will benefit from pound cost averaging, whereby the regular contributions purchase units at varying prices, some high and some low; when markets drop, you are purchasing more units in a fund than when the price is higher, and when markets recover, which invariably they do, this results in an increase in the value of the portfolio. In addition, regular savings benefit from compound interest. Albert Einstein once said compound interest was the eighth wonder of the world. Effectively, you are earning interest on top of your interest. Most importantly, the longer the investment time horizon, the better compound interest works. Saving just a relatively small amount each month for children will result in a reasonable pot for the little ones by the time they need their first car, house deposit or university fees.
Open a Junior ISA
The question is what do you save into? Junior ISAs allow you to save £9,000 each year. Parents or guardians with parental responsibility can open a Junior ISA and manage the account, but the money belongs to the child. The child can take control of the account when they’re 16, but cannot withdraw the money until they turn 18. This is where the potential issues can arise. 18-year-olds do not necessarily have a great grasp of money, and the last thing you need is an 18 year old blowing your hard-earned savings on getting drunk with their mates. I’m sure for most they are relatively sensible but the issue of control for me is one of concern.
Get them started with a pension
Making child pension contributions is a tax-efficient way to save for retirement for your offspring. What is more, they are unable to access this until they retire, which hopefully means they are a little more financially savvy than at 18, but possibly not. The contributions are limited to £3,600 per annum gross (£2,880 net) but given an investment time horizon of 50+ years, there is plenty of time for investment growth. Given funds cannot be accessed until at least age 57 (by the time they can draw it) you could look to increase the investment risk in the earlier years to really maximise the opportunity for investment growth.
Teach them about money management
Children need to be educated about finances and financial wellness, in the same way, they are taught to read and write. Too many of the younger generation very early in their adult lives get into debt because they haven’t been taught how to budget, or educated about the benefits of saving for the future. It is essential that financial awareness and an understanding of money is part of the National Curriculum and that parents spend time teaching their kids about the importance of organising their finances and managing their money wisely.
Children have a fantastic ability to learn, that is why it is so important to get them to understand how money works. Borrowing can appear cheap with interest rates so low, but it can be very easy to get into trouble financially particularly at a young age. We need to ensure that not only our children but our children’s future are protected, which is why it is so important to help them, both financially and educationally. I’m quite happy to continue giving my children pocket money for them completing their chores, and I’ll let the bank of mum and dad take care of the rest, at least for now!
No news or research content is a recommendation to deal. It is important to remember that the value of investments and the income from them can go down as well as up, so you could get back less than you invest. If you have any doubts about the suitability of any investment for your circumstances, you should contact your financial advisor.