Thank you to Mrs M for asking us to present our thoughts on investing for children. “I have recently made a decision to put the money in a savings account, which will become fully accessible to my child when she turns 18. However, I am wondering whether it would be better to invest? There is a lot of information out there on various tax wrappers, as well as ways of controlling how the monies are spent. So what should I look for when making a decision?” As always, we encourage our other avid readers to send us in requests for future post topics.
The simple answer to the question is, yes by all means you should invest. All we have to do is look at the numbers: say you had invested £100/month from the time your daughter was born into a selection of global stocks (such as the MSCI World Index), and she turned 18 this month, then she would have a lump sum of £54,237 as a nice birthday present. If instead, you had put your money into a savings account to earn interest, then you would have ended up with less than half that amount.
But, before you say that the bank is safe and you are worried about the high price levels of the stock markets, ask yourself: if you don’t take risk when you are young, when exactly are you ever going to take your chances? In the world of investing, we are certain to be rewarded for the risks we take and interestingly, during the last 18 years of our example, we have gone through several market crises (2001 & 2008) and yet still ended up with such a large lump sum. The benefit of investing every month is that you also buy when the markets are down and as such you also average out your entry price, which over the long term has shown to be the best way to create wealth.
What is the most suitable vehicle or wrapper to keep your child’s monies in? The likes of a junior ISA could be a good start, although the current maximum you can invest annually is £4,260 – so it depends how much you intend to invest. The benefit of an ISA is that gains are not taxed when you take the monies out. There are typically no set up fees, and the annual charge for an ISA platform is rather low (circa 0.45% p.a.). However, there isn’t really a way for you to control what your child spends the money on. The only way to assure that is by setting up a trust, where stipulations as to the uses and timing of the payments can be set out. But this comes at a price and the set up and administration of a trust really only becomes economical with sums in excess of £1 million.
The final thought on the subject is that statistically, most families lose their wealth not because of poor investment decisions, but rather as a result of ‘behavioural’ issues within the family itself. So, it is probably also a good idea to educate your children on how to take responsibility for the money that you have so kindly bestowed upon them.