Investing for your children

With a royal birth hitting the news this week, Darius McDermott, managing director of Chelsea Financial Services, considers how best to save towards your family’s future.

Investing for your children

This week, royal family fans across the world were excited to hear the news that Prince William and Kate Middleton, the Duchess of Cambridge, are expecting their third baby.

Welcoming a new member to any family is a life-changing event, bringing happiness, sleep deprivation and extra financial responsibilities all at the same time. While the royal family are fortunate that they don’t have to worry about money, most other expecting couples should think about how they can build a nest egg for their baby.

Here are four ways you can save towards your child’s financial future:

1) Open a children’s savings account at a bank or building society with as little as £1. Your child will receive a debit card (with no overdraft facility), which can be a good first step towards learning about saving and spending. Interest rates are very poor though, so your kids won’t learn about the eighth wonder of the world: compounding! More on that below (see point 4)!

2) If you want a better cash rate, you can contribute regularly to a tax-efficient Junior cash ISA. This belongs to the child, so parents will not be able to withdraw money from it. Your child can gain access to the money from the age of 18. Rates are slightly better at 1-2%.

3) Another option is a Junior stocks and shares ISA, which allows you to invest in the stock market on behalf of your child. This means taking on more risk, in the hope of achieving better returns. Just £50 per month over 18 years could generate up to £17,500 (assuming 5% annual growth after charges).

4) Contribute regularly to a Junior SIPP, which is another tax-efficient structure. Again, parents are unable to access the money and the child can only get to it when they are 57 (from 2028). It offers exposure to the stock market and the potential to benefit from compounding returns over the long term.

What do people prefer?

Back in November of last year we asked FundCalibre visitors what they thought was the best way to save for a child. The response was overwhelmingly a “Junior stocks & shares ISA” – voted for by 87% of respondents. A Junior SIPP was second (just 7%), with Junior cash ISA and a regular savings account joint third at 3% each. Respondents may have used more than one of the options, but they felt the Junior stocks and shares ISA was the best of the lot.

When you invest for children, the time horizon is naturally longer which means some parents are willing to take on a little more risk.

If you are looking to open up a Junior stocks & shares ISA, here are three funds to cater for different risk profiles:

Lower risk

When it comes to the lower risk category, I’d be minded to go for a fund that invests predominantly in equities but has the flexibility to invest in different geographies or assets. This provides diversification and allows the manager to dial down risk when they feel cautious.

My choice in this category is Jupiter Merlin Balanced. This multi-manager fund can have between 40-85% in equities. It aims to provide capital growth and a decent level of income (which can be reinvested for children).

The team seeks to identify opportunities created by short-term market movements, but will also take defensive measures where appropriate. They select what they see as the best fund managers in each asset class, with the ultimate aim of producing the best possible returns in any macro-economic environment.

Medium risk

If you are happy to take on more risk, UK smaller companies are a good place to start. Over the long term, some investors in this market have been rewarded handsomely. This is because the best smaller companies today can become the large caps of the future. Marlborough Special Situations is a great way to gain exposure to this part of the market. It is managed by Hargreave Hale – one of the best small and mid-cap boutiques in the country. The fund is diversified, with about 200 underlying small and mid caps. This reduces single company risk.

Marlborough Special Situations has a stellar track record, with annualised compounded growth at 17.44%[1] for more than 20 years and a cumulative return of 3,404%[2].

High risk

If you are looking for the prospect of strong returns over the long-term, the Baillie Gifford Shin Nippon investment trust is worth a look. Shin Nippon, which means ‘new Japan’, focuses on sectors where the manager sees innovative growth opportunities. The team is prepared to bide its time while these companies reach their full potential. Although the trust can be volatile, patient investors have been richly rewarded over time.

The trust currently has exposure to Japan’s emerging services industry, which is expanding fast due to government de-regulation and corporate outsourcing. The team also likes retail and finance, where niche opportunities can be found.

 

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Darius’s views are his own and do not constitute financial advice. Please remember, no news or research item is a recommendation or advice to buy. Every Investor is not responsible for accuracy and may not share the author’s views. If you are unsure of the suitability of any investment for your circumstances please contact an adviser.

[1]     Source: FE Analytics, annualised compound growth in sterling, July 1995 to 4 September 2017

[2]     Source: FE Analytics, cumulative total returns in sterling, July 1995 to 4 September 2017

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