This in-between, late-summer period after the schools go back and before the older ones head off to or return to university is a good time to think about investing for your kids. Even better if your children are too young still for the academic calendar to have started ruling your life.
My three are closer to moving off than onto the payroll so I’m able to view this subject with a mixture of experience and (mainly) regret. Like most other parents, when my kids were young enough to really benefit from the miracle of compound growth, my wife and I were not exactly flush with cash. No-one should pretend that saving for children is an easy option when there are so many other calls on your salary.
I keep that knowledge front of mind when telling people how a few hundred pounds a month can transform your kids’ financial prospects. A few hundred pounds is a lot of money when you are drowning in nappies, tantrums and trying to get on at work.
But on the basis that the best time to think about starting to invest is always a few years ago, let’s forget that it’s hard and look at the best way to do it. And let’s remember too that even small amounts put aside and left to grow are better than nothing.
It’s worth thinking about why you’re investing for your children in the first place. The principal reasons are: school fees, university and getting on the housing ladder. After that most people would probably consider it job done, but it’s worth considering too that, if you are so inclined, you can also give your children’s retirement finances a useful boost.
Obviously, all of these goals work on a different timetable which will affect both what you invest in and the way you do it.
If you are saving for school fees, you are probably looking at a 10-year time-horizon at best and you will need to access the money long before your children turn 18.
This matters because it precludes the use of tax-efficient savings wrappers in your children’s names which tie up their money until they come of age. Junior ISAs are therefore out. The stock market probably makes sense in the early years of saving but as your child approaches school age you will probably want to de-risk your savings to make sure there’s enough to last until the A-levels are in the bag.
For this kind of saving you are probably going to be reliant on your own tax-free allowances, so it makes sense to use a proportion of your annual £20,000 ISA allowance for this. And don’t forget that both you and your spouse have an individual allowance, so even the eye-watering amounts required for private schools these days should be manageable in a tax-efficient way.
Realistically, most people putting their children into fee-paying schools are going to do it out of their own income or thanks to the generosity of their own parents.
This is where most people start to get really interested in helping their children out. Not least because they worry that leaving their children to fund college themselves via a loan will saddle them with either a scary amount of debt or a higher income tax rate for most of the rest of their working lives.
I think it’s important not to think of a student loan as debt because the reality is that under current legislation it will be written off by the government after 30 years. Of course, this might change in the future but for now it is wrong to think of this in the same way as any other kind of borrowing.
Perhaps the more important consideration is the effective graduate tax that your children will take on. Once a former student starts earning, they will pay an extra 9% of any earnings above £2,143 a month in income tax. Many would prefer not to see their children lumbered with even higher taxes than they will be liable for anyway if they get on and become a higher-rate tax-payer.
The cost of tuition fees and living costs for a typical three-year course mean that avoiding this will probably cost around £50,000. That is a lot of money, but achievable if you start saving early enough and the stock market is kind to you.
Crucially, over a period of 18 years it is extremely unlikely that the stock market will end up lower than you started (it never has over that many years in the past 120 or so tracked by the Barclays Equity Gilt Study) so in a low-interest rate environment investing in shares or funds is the obvious choice.
Given that the money will only be required on or after your child’s 18th birthday, it also makes a Junior ISA (JISA) the obvious vehicle for this kind of saving.
Money invested in a JISA can be provided by anyone, but the account must be set up by a parent or legal guardian. Crucially, the money belongs to the child, so a degree of trust is required when it comes to agreeing what the money should be used for at age 18. As an added bonus, once a child reaches 16 they can hold an adult cash ISA concurrently with their JISA. The allowance for saving into a JISA in 2019/20 is £4,368 which can be split how you choose between a cash or stocks and shares JISA.
Buying a house
One of the biggest causes of angst among young adults is how they will ever get onto the property ladder as their parents, apparently effortlessly, did. The truth is it wasn’t as effortless back in the 1980s as our kids think but it is plainly more difficult today than it was.
There are two challenges here for a young house-buyer. The first is earning enough to persuade a lender to give you a big enough mortgage to buy your first home. There is not much a parent can do about this other than helping fund university (see above). The second challenge is pulling together a deposit.
Here the Bank of Mum and Dad can help, either with an advance on the inheritance to fund the down-payment or with help saving towards it.
The way that I have chosen to do this for my children is to offer to match their own savings up to a given figure for an agreed number of years. Remember to make this affordable for all your kids rather than being overwhelmed with a desire to help out with the first and then struggling when the others put in their request for assistance, perhaps simultaneously.
One of the lesser known ways in which you can help your children out financially is to give them a leg-up on the pensions front. This might seem an odd thing to be thinking about while you are still trying to get your own retirement savings in order, but it is a fantastic way to take advantage of a generous tax perk and the power of compounding at the same time.
Just like adults, children are able to start saving into a self-invested personal pension (SIPP) from the day they are born. As with non-working adults, they are eligible for a 20% uplift to their savings even if, as is likely, they are not actually paying any income tax. This means that the £3,600 annual allowance for a child’s or non-taxpayer’s SIPP can be achieved by saving just £2,880 a year.
The real attraction of a SIPP for a child, however, is not the short-term tax perk but the long-term benefit of compound growth. If you are able to put aside the maximum for the first 18 years of their life and invest it and it grows on average by 5% a year, they won’t need to save another penny for the rest of their life, just keeping it invested at that 5%, to become a pension millionaire by the age of 65.1
The only drawback from their point of view is that they won’t be able to access the cash until they are at least 55. Please also note these figures assume average growth of 5% per year which cannot be guaranteed.
In the chaos of those early years, your kids’ university education or first house purchase, let alone retirement, probably seems impossibly far away. But there’s no better time to get started saving for those apparently distant events than now. Before you know it, you’ll be heading off on your empty-nester holidays, walking past empty bedroom doors (sniff) and wondering where 30 years went.
More on ISAs
More on Junior ISAs
More on Junior SIPPs
1Fidelity International, September 2019. Based on investing £3,600 each year for the first 18 years and nothing thereafter, with average annual investment growth of 5% over the entire 65 year period.
Important information The value of investments and the income from them can go down as well as up so you may get back less than you invest. Tax treatment depends on individual circumstances and all tax rules may change in the future. Withdrawals from a pension product will not be possible until you reach age 55. Withdrawals from a Junior ISA will not be possible until the child reaches age 18. Junior ISAs are long term tax-efficient savings accounts for children. A Junior ISA is only available to children under the age of 18 who are resident in the UK. It is not possible to hold both a Junior ISA and a Child Trust Fund (CTF). If your child was born between 1 September 2002 and 2 January 2011 the Government would have automatically opened a CTF on your child’s behalf. If your child holds a CTF they can transfer the investment into a Junior ISA. Please note that Fidelity does not allow for CTF transfers into a Junior ISA. Parents or guardians can open the Junior ISA and manage the account but the money belongs to the child and the investment is locked away until the child reaches 18 years old. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.
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