Your ten-point plan for investing for kids
1. The advantage in investing for children is the long time-horizon – possibly 18 years from birth to adulthood. This means you can (and should) invest in something higher risk than cash. You’ll get better returns and if there is a stock market crash, your investment should have time to recover before you need to cash it in.
2. First stop then is a Junior Isa (Jisa) provided by most financial services firms. This is a kind of tax-free box into which you can keep both cash (savings accounts) and investments (shares, bonds or funds). You - and others - can put in a maximum amount every year. It's £4,260 for the 2018-219 tax year. The money can’t be withdrawn until the child takes full control of it at the age of 18.
3. With the money in the Jisa, what then? You could invest in single shares such as Marks & Spencer but this is a high-risk strategy. It’s better to choose a fund which invests in lots of shares so the risk is spread. Unfortunately you’ll have to pay for this so consider a low-priced fund because fees really eat into your return, especially over the long term.
4. Low-cost funds include tracker funds, which use computers to replicate the returns from a stock market index such as the FTSE 100. BlackRock, Fidelity and Legal & General have funds for 0.1% or less a year.
5. Some investment trusts (a company which invests in other companies) are also good deals: Scottish Mortgage and City of London charge around 0.45% annually.
6. Before the Jisa was introduced, many children were given government money to be put into a Child Trust Fund. These are still running but new ones are no longer for sale. If you have one, you should transfer it to a Jisa where there is greater choice.
7. You don’t have to put in the full allowance every year. Some firms let you put in much less. Aberdeen for example has a scheme with minimum payments of £150 for a lump sum or £30 a month.
8. If you’ve got more money than the Jisa allowance, you could also set up a pension for your child. The maximum contribution of £2,880 a year is worth £3,600 in a Junior Sipp (self-invested pension) after the tax top-up.
9. Outside the tax-free schemes, you can still invest, either through a plan where the child receives the money automatically at 18 or one where a trustee decides on the handover. Tax is taken at the child’s individual rate unless money received from parents generates more than £100 a year. In that case, the return is taxed at the parental rate.
10. Take care to transfer the investment into the child’s name when they reach 18. Selling may trigger a tax charge and/or the stock market might be having a low moment. The child can hopefully continue the investment rather than blowing it on a gap year.
- SMM likes Fidelity, Charles Stanley and Hargreaves Lansdown as Jisa providers. HL has is a very clear guide here.
- More about investment companies at their Association website.
- Tax matters and more information at the Money Advice Service.
Last updated 2 September 2018.