A guide to investing for your children
While your baby is small, a child trust fund brings nothing but joy. You have free money, a readymade receptacle for grandparental Christmas presents, and you can make regular contributions too.
When your child turns 18, on the other hand, if this remains your sole vehicle for investment, it may be a recipe for disaster. For starters, what will happens if one child had a CTF and the other was too old to qualify? And, if all your children qualified, how will you feel if the money you worked hard to squirrel away is splurged on teen delights? You may, therefore, want to look beyond the CTF when investing for your children.
The traditional avenue has always been a bank account. This certainly has its uses, particularly for older children who will need the money within five years, for emergency cash savings, for small sums to teach children about the value of money, or for extremely risk-averse parents.
However, not all cash accounts are the same. An instant access account makes the most sense when saving for the short term. You can save in your own name and control the money yourself.
If you would rather save in your child’s name, and make the most of their tax allowance, there are plenty of options. While these accounts don’t pay as well as internet accounts, they do offer branch access, and pay far more interest than an adult branch account.
If you plan to make regular contributions, there are regular savings schemes offering attractive rates. To find the best saving accounts for you and your family, check out our daily round-up of the savings market.
Traditionally, many parents have turned to National Savings and Investments’ Children’s Bonus Bonds, which offer fixed tax-free interest on a maximum of £3,000 for a fixed five-year period. However, it’s a rigid investment, which is unsuited to short-term savings, and the interest rate currently on offer is just 4.45%, which compares poorly to children’s savings accounts.
If investors have more time, and are willing to take performance risk, there are also several options open to parents that give them exposure to assets like shares, commercial property and bonds. Narrowing down these investment options requires a number of decisions. First, investors need to choose a vehicle.
There are four types of collective investments worth considering.
Number one is a friendly society bond. These are only on the list because they’re tax-free, but they have low maximum investments of £270 a year, and are fixed for at least 10 years. They also invest in unfashionable with-profits funds, which aren’t transparent and have posted some shocking performance figures in the past decade. So, if you opt for these, you need to look very carefully at the underlying investment. Darius McDermott, managing director of Chelsea Financial Services, says he would never recommend this kind of investment.
Number two is unit trusts. These collect money from a huge number of investors, and then give it to an expert fund manager to buy a mixture of assets. This spreads the risk because, if one asset falls, there’s a good chance another will be rising to help offset the drop. There’s no limit to how much money can be piled into a unit trust, so the price reflects the performance of the shares it is invested in.
Number three is investment trusts. These are similar to unit trusts in that they are collective investments. There are, however, two differences. The first is that the fund manager is allowed to borrow money to invest, this means gains or falls may be magnified. The second difference is there is a limit to the number of people who can invest, because the trust is structured as a share.
So if demand for the shares increases, the price goes up and, if demand decreases, it falls, so the value of an investment trust depends on the performance of the underlying investments, and on demand for the trust itself.
All this mean there’s more risk attached to investment trusts, so when the market’s rising they tend to do better, and when it’s falling they tend to do worse.
There are unit trusts and investment trusts that have been branded as children’s savings plans, including Witan’s Jump account, The Scottish Investment Trust scheme (Stockplan: A Flying Start), and an account from Baillie Gifford. The main difference is that they have been made easy to set up for children – either in a trust or in a designated account (see page 20), plus they tend to accept low regular monthly payments. However, beyond this, they are the same as any other unit or investment trust.
Number four is a stakeholder pension. It may seem odd planning for something so far away, but Ashley Clark, director at needanadviser.com, points out: “If, for example, you invested the child’s benefit in a pension from day one until the day they stopped receiving it, and then made no more contributions until they retired, assuming typical projection rates, the child would be a millionaire in retirement. Of course, it’s a balance between accessible investments and very long-term planning, but the benefits make it well worth considering.”
Once you know what vehicle you want to use, you need to select the underlying investments. You should start by working out your attitude to risk. This will depend on a number of factors, including the length of time you have available, the other investments your child has, and your general approach to risk.
If it’s your first step into investing, a general global growth fund may be suitable. Gavin Haynes, managing director of Whitechurch Securities, says: “You could consider a big international investment trust, like the Witan Investment Trust. It’s globally diversified and, over the long term, it makes sense to have global exposure rather than having all your eggs in a UK basket, because globalisation is only going to get bigger in the future.”
Darius McDermott agrees: “I wouldn’t put it all in the UK, especially as it doesn’t look good on an 18-month view.”
If you already have a core investment, you can take more risk. Haynes says: “If you’re saving for 20 years you can invest in more speculative areas, where the risk will be higher, such as emerging markets. It makes sense to go into markets where the economic power will be held when the investment matures. So you could consider a general BRIC fund (investing in Brazil, Russia, India and China), such as the Allianz BRIC Stars Fund or the First State Global Emerging Market Leaders.
“I’d probably suggest putting it in China,which should see growth for the next 20 years,” McDermott adds. “But you should expect some volatility; it fell 50% at the start of this year.” He also favours the US on a 20-year view, and would consider putting at least some of the investment into Gartmore US.
Similarly, a global smaller companies or special situations fund may be suitable, on the grounds that they take a little more risk and offer the potential for a little more return. McDermott favours Rathbone Global Opportunities.
Alternatively, investors may want to take a more tactical approach. Clark explains: “I recommend clients buy low and sell high. At the moment, the UK stockmarket has fallen 20% and commercial property has fallen 20% and no one is buying – I’d say that’s a great buying opportunity.
“By contrast, the headlines about emerging economies and the Far East have been very positive and growth has been phenomenal, which would suggest it’s set for a correction.” If investors take this sort of approach, Clark recommends revisiting investments once every three months.
When you’re picking an investment, adviser recommendations are a good place to start. However, it’s also important to do your own research. It’s about finding a fund that matches your objectives, and risk profile.
Funds can vary widely, even within the same sector, so it’s worth examining the strategy closely.
It’s also important to consider charges. Clark says: “I came across a client who had been encouraged to invest in an individual savings account with charges of 4.3% a year. That means it has to make 4.3% just to stand still. Even if they’re lower, charges can really mount up over the long term.”
It also pays to look for robust and consistent performance. While it’s not a guide to future returns, it will give you an idea of whether the fund has delivered on its promises in the past.
There are clearly a myriad of opportunities when it comes to saving for children. Weighing each one up is no easy task. It may take time and effort, and even a little advice. But, it’s worth the effort if you want to avoid feuds when these investments mature. a fund that matches your objectives, and risk profile. Funds can vary widely, even within the same sector, so it’s worth examining the strategy closely.
A form of money purchase defined contribution pension launched by the then Labour government in April 2001 with low charges and no-frills minimum standards. Designed to appeal to people on low and middle incomes who wanted to save for retirement but for whom existing pension arrangements were either too expensive or unsuitable, the stakeholder didn’t really take off and looks to be superceded by the National Employee Savings Trust (NEST).
A collective investment vehicle (known in the US as a “mutual” or “pooled” fund) and similar to an Oeic and investment trust in that it manages financial securities on behalf of small investors who, by investing, pool their resources giving combined benefits of diversification and economies of scale. Investors buy “units” in the fund that have a proportional exposure to all the assets in the fund, and are bought and sold from the fund manager. The price of units is determined by the value of the assets in the fund and will rise or fall in line with the value of those assets. Like Oeics (but unlike investment trusts) unit trusts and are “open ended” funds, meaning that the size of each fund can vary according to supply and demand of the units form investors. Unit trusts have two prices; the higher “offer” price you pay to invest and the “bid” price, which is the lower price you receive when you sell. The difference between the two prices is commonly known as the bid/offer spread.
Investment trusts are companies that invest money in other companies and whose shares are listed on the London Stock Exchange. As with unit trusts, private investors buying shares in an investment trust are buying into a diversified portfolio of assets (to reduce risk), which is managed by a professional fund manager. Investment trusts differ from unit trusts in two important ways: they are listed on the stockmarket and so are owned by their shareholders and are closed-ended funds with a finite number of shares in issue. This means the share price of investment trusts might not reflect the true value of the assets in the company (known as the net asset value, or NAV) and if the NAV value of a share is £1 and the share price in the market is 90p, the trust is said to be running a discount of 10% to NAV. But this means the investor is paying 90p to gain exposure to £1 of assets. Investment trusts can also borrow money and use this money to buy investments. This is known as gearing and a geared trust is thought to be more of an investment risk than an ungeared one.
An individual employed by an institution to manage an investment fund (unit trust, investment trust, pension fund or hedge fund) to meet pre-determined objectives (usually to generate capital growth or maximise income) in prescribed geographic areas or investment sectors (such as UK smaller companies, technology or commodities). The manager also carries the responsibility for general fund supervision, as well as monitoring the daily trading activity and also developing investment strategies to manage the risk profile of the fund.
Generic, loosely-defined term for markets in a newly industrialised or Third World country that is in the process of moving from a closed economy to an open market economy while building accountability within the system. The World Bank recognises 28 countries as emerging markets, including Argentina, Brazil, China, Czech Republic, Egypt, India, Israel, Morocco, Russia and Venezuela. Because these countries carry additional political, economic and currency risks, investors in emerging markets should accept volatile returns. There is potential to make large profit at the risk of large losses.
An acronym, which stands for Brazil, Russia, India and China; countries all deemed to be at a similar stage of advanced economic development. The term was coined in 2001 in a report written by Goldman Sachs director Jim O’Neill who speculated that, by 2050, these four economies would be wealthier than most of the current major G7 economic powers.