Investing for your children’s future

Investing for your children could make a huge difference to them later in life – and sustainable investments are increasingly popular

For many parents, saving and investing on behalf of their children is an important part of giving them the best possible start in life. For parents who can afford to do so, this is an opportunity to build up a nest egg for children – and even relatively modest savings, if made regularly, have the potential to grow into substantial sums, if you manage the money well.

The obvious reason to invest on behalf of children is to give them a financial boost just when they need it. That might be support with the cost of university education, which continues to increase, or help with getting on the housing ladder, as house prices go on rising. The money might even come in handy much later in your children’s lives.

But there are other benefits to consider too. It’s possible that by moving some of your wealth to your children now, you will reduce the inheritance tax bill they have to pay in the future. And talking to your children about the investments you’re making can help improve their understanding of money – and teach them about financial independence.

Where to invest for children

Putting cash into a building society savings account for your children is a simple option, but it’s very often not the best. That’s because, over the long term, cash savings tend to underperform other types of investment – and if you’re investing for a new-born child to generate cash for when they become adults, you can afford to take that long-term view.

Indeed, cash savings may even lose value after taking inflation into account. With inflation at, say, 1%, £100 would be worth just £82 after 20 years; with inflation at today’s elevated level of 5%, the figure falls to £36. No cash savings account in the UK currently offers a higher rate of interest than today’s inflation rate.

The stock market, by contrast, looks more compelling. If you had invested £1,000 in 1986 in the biggest companies on the stock market, the money would have been worth £17,323 by 2021. There is no guarantee that success will be repeated, but stock markets have in the past outperformed other assets over the long term.

The difference between these two different types of investment is that cash savings, at least in absolute terms, will not fall in value – although in today’s rising inflation environment, the risk of real losses is serious. Stock markets, by contrast, can go down as well as up, particularly in the short term, so parents must be prepared to accept some risk.

Making regular savings – a fixed cash sum each month – can help you manage this risk. In months when the stock market is down, your monthly contribution buys more shares, which helps you bounce back more quickly as the market recovers. And regular savings helps with another problem too; research by Boring Money found that while more than 60% of new parents start investing for their new-borns, the number has dropped to 54% by the time children get to secondary school age. A regular savings scheme will keep you disciplined.

Investing sustainably

One thing to consider as you plan children’s investments is young people’s growing interest in sustainability and other ethical issues. Would your children – now or in the future – want you to invest on their behalf in areas they may disapprove of? Given that research from Bath University suggests nearly 60% of young people are worried about climate change, for example, this may be really important.

In fact, there is good evidence to suggest that investing sustainably – through products and services that explicitly focus on environmental, social and governance issues – is a very good way to have a positive impact. Research from the Danish bank Nordea suggests it may be up to 27 times more efficient than taking shorter showers, flying less, travelling by train instead of by car, and eating less meat.

Nor do you have to compromise on investment returns. Research from Refinitiv found that global ESG funds outperformed their “conventional” counterparts by almost 10% over three years, while UK ESG funds outperformed by 15% over five years.

Nevertheless, tread carefully with sustainable investment. The financial industry recognises the huge demand for ESG products and services – and there is growing concern about “greenwashing”, where sustainability claims are overblown. You may need help to identify the right approach – and the products to trust – when pursuing this sort of investment.

Focusing on the practicalities

Investing for children means making some decisions about how to do it practically, as well as where to invest. For example, should you hold the investments in your own name, so that you keep complete control of the money? If so, you may have to pay tax on income and profits. The alternative is to register your accounts in your children’s names – through a simple arrangement such as a bare trust – which may be more tax-efficient; but you may have less control over when they get access to the cash, or how they use it.

Timescales are important too. Will you definitely be able to leave the money untouched until your children reach a certain age? If you think you might need to access it sooner, this will affect your choice of investment – the stock market’s potential volatility in the short term, for example, may make it unsuitable. And some products require you to lock up savings for a set period.

Several financial products are aimed specifically at the children’s market. For example, junior individual savings accounts (JISAs) are open to any UK-resident child under the age of 18, and come with an annual maximum investment of £9,000. The cash can be invested in a very broad range of assets and all returns are tax-free. You can even invest in a pension on behalf of a child (but they won’t be able to get at the money until they retire); in most cases, you can invest up £3,600 this way, though tax relief reduces the cost of that investment to just £2,880.

With so many decisions to make about how to invest for your children, it’s a good idea to seek some help for yourself. A financial adviser can help you make the right decisions for your individual circumstances – including your attitude to risk and your current financial position. They’ll also be able to help you find the best products and services through which to put these decisions into practice.

Finally, don’t miss the opportunity to teach your children about good financial habits when saving and investing on their behalf. This is a great opportunity to talk to them about the importance of saving – and to build the conversation out to cover budgeting and spending. They’ll thank you for it in the end.

The value of your investments can go down as well as up, so you could get back less than you invested.

The Financial Conduct Authority does not regulate tax advice.

Content correct at time of writing and is intended for general information only and should not be construed as advice.

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