How you can best invest for your children's future
There are so many things to do for your children when they're born – it can seem like an endless round of feeding, burping and rocking to sleep. But there's one thing you can do that will last long after all that 24-hour care is forgotten: invest for their future.
Of course, it's hard to find the time to work through all the options around. Fortunately, to save you all the time and trouble, the Moneywise Children's Savings Awards has identified the best of each type of savings and investment plan on offer.
But before you start examining the winners, you need to identify what kind of investment or savings vehicle will work best for you and your children. The starting point is working out what kind of saver or investor you are, and how much risk you're willing to take.
For many people, the temptation to err on the side of caution in everything relating to their children is understandable. However, this needs to be tempered by other considerations.
Saving for children involves a reasonably long time frame, which means in theory you may be able to take a little extra risk.
If you invest in shares, for example, the value of investments may vary wildly over two or three years, but over the 18 years or so of the investment, in the vast majority of cases, shares will significantly outperform cash.
You also need to take into account how much you can put aside, and how much you'll need at the end of the period. If you want to provide your kids with a financial buffer for a couple of months after they turn 18, you may want to opt for something low-risk, as you won't need too much growth.
But if you're saving for something sizeable, such as helping them through university or onto the property ladder, you may want to opt for a product that has the potential for more growth – even if this can't be guaranteed.
The risk spectrum
Once you know your risk appetite, you can match it to an asset type: cash, bonds, property or shares. The risks will vary with each type of investment, but there's an approximate risk spectrum – the further you go along it, the more risk and more potential reward you face.
The first stop on the spectrum is cash. For kids, this will either be a children's savings account or a cash child trust fund (CTF). For slightly older children, it will often mean a youth account. All of these carry very little risk.
The only things you need to worry about are not exceeding £50,000 with any one provider – so you don't lose out if they run into difficulties – and the risk of your savings not growing fast enough to match inflation. It's worth looking for an account with a reasonable interest rate, for example.
The next stop is bonds or commercial property. For children, these tend to be accessed through a shares CTF.
Alternatively, some advisers suggest a mixed fund, which allocates money to bonds, commercial property and shares, spreading the risk further. Again, these can be accessed through a shares CTF.
Venturing into shares
Shares lie at the far end of the risk spectrum. But if you don't want to take an unguarded step this far, the government has introduced stakeholder CTFs. These invest in shares and therefore expose investors to potential growth.
However, they are prevented from investing in the riskiest options, and are designed to switch into assets that are traditionally considered less risky – such as bonds – in the five years before the CTF reaches maturity, protecting you against sudden falls in the stockmarket as maturity approaches.
If you're willing to venture into shares, there's a huge variety of funds on offer which will invest in a bundle of shares on your behalf. First along the risk spectrum is equity income funds, which are usually considered the least risky, and can be accessed through shares CTFs.
Next come global shares funds. Many of these are available through CTF shares funds, and are the most common option in children's investment trust savings schemes.
Still further along the spectrum are funds focused on particular geographical areas, ranging from the UK, Europe and the US to the riskier Far East – and the very risky single-country funds in emerging markets.
These are options if you're looking for a great deal of potential and are willing to take quite a big risk. They're available through self-select CTFs, shares CTFs and some investment trust children's investment schemes.
And finally, there are single company shares, which are accessed through self-select CTFs and involve perhaps the highest risk of all.
Once you've matched an asset to your risk profile, you also need to think about the features of the individual vehicles on offer.
The Moneywise Children's Savings Awards have picked out the best features of each product, but it's still worth getting to grips with the finer details of each type of investment to make sure it's right for you.
Tax, access and control
One of the biggest decisions is choosing between a CTF and an equivalent from outside the CTF regime – whether that's cash, shares in a fund, or an investment trust savings account. The primary differences concern tax, access and control.
If you're keen to have tax-efficient savings, CTFs offer tax-free growth for savings up to the annual contribution limit of £1,200. Savings outside the CTF will be taxed as belonging to your child, which means they are tax-free up to a point, but beyond that will face tax.
Also bear in mind that if the savings come from you, they may be taxed as belonging to you.
In terms of access, children can only get their hands on the money in a CTF at the age of 18. On the plus side, this will avoid the danger that they will spend it as they go along, but can cause cash problems if they really need the money in the interim.
Saving in a CTF also means accepting that at the age of 18 your children will have full control of the money, to spend as they please.
Other investments and savings for children follow the same general rule but can be structured so that you can keep an element of control over how and when the money is spent.
There are plenty of decisions to be made before you settle on the right kind of vehicle for your children's savings. It's just one more thing you'll end up doing for your kids.
However, once you've done this, the Moneywise Children's Savings Awards are here to help – giving you a head start in the tricky decision of picking the best of breed in each category.
|Five questions to ask yourself when you're choosing how to save for your kids|
|How much risk are you prepared to take?|
|How much growth do you need?|
|Will you need the money before your child reaches 18?|
|Are you happy for your kids to have control of the investment?|
|Are you saving enough to have to worry about tax issues?|
All investment returns are measured against a benchmark to represent “the market” and an investment that performs better than the benchmark is said to have outperformed the market. An active managed fund will seek to outperform a relevant index through superior selection of investments (unlike a tracker fund which can never outperform the market). Outperform is also an investment analyst’s recommendation, meaning that a specific share is expected to perform better than its peers in the market.
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 increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
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.