Give your kids' cash a chance to grow

Published by on 04 September 2014.
Last updated on 04 September 2014

Grow plant

Children, especially babies, have one very important characteristic in common with the world's most sophisticated and successful investors.

They might not have vast amounts of money or understand how stockmarkets work but they do have time on their side. Because they can leave their money invested for very long periods of time - often up to 18 years or more - they can afford to take bigger risks in return for greater potential returns than their parents.

Investment trusts and funds/OEICs

Parents face a bewildering choice when it comes to selecting investment funds for their children's money.The first decision is between funds (also called open-ended investment companies or OEICs) and investment trusts. OEICs can create an unlimited number of units, the price of which goes up and down in line with the underlying assets. In contrast, investment trusts have a limited number of shares, the price of which goes up and down in line with demand, separate to the value of their underlying assets – referred to as the net asset value.

Mark Dampier, head of investment research for Hargreaves Lansdown, says: "Investment trusts have had a strong run over the past few years and many are trading at either a premium or at net asset value.They are not the bargain they were a few years ago, so beware past performance numbers."

For cautious investors, he suggests RIT Capital Partners Investment Trust, which has a mandate to preserve capital and stands at a discount of around 5%. "Newton Real Return does the same job in the OEIC world, and at the moment is very defensive with 20% in cash. However, I wouldn't consider either if I was investing for a time frame of 15 years or more," he says.

For parents prepared to take more risk, he suggests Woodford Equity Income, the fund recently launched by investment guru Neil Woodford. Dampier suggests reinvesting the income to benefit from compounding.

"You might also like to look at emerging markets, and Templeton would fit well here. It's a big liquid trust on a discount of about 10%, giving exposure to the rising middle classes in the undeveloped but faster-growing economies in the world," he says.

Parents who do opt for stockmarket-based investments do need to keep an eye on the time frame, especially if cash is needed for a specific purpose such as university fees.

Dampier says: "If you are lucky with timing and you have made good profits, you might want to look at selling up a year or so earlier than you need the money. Ideally, don't put yourself in the position that you have to sell just at a bad time in the markets."

Children benefit from their own personal income and capital gains allowances but to learn more about how to protect returns from tax.

Find the best funds and invesmtent trusts using our powerful search engine

Premium bonds

Premium bonds are one of the UK's most popular ways to save, with £48 billion deposited in them. There's a good reason for this: they are run by National Savings & Investments (NS&I), a state-backed organisation, making them a very safe place to put money.You are guaranteed to get your original capital back.

However, rather than earning interest, your bonds are entered in a monthly draw for 1.84 million tax-free prizes ranging between £25 and £1 million, although you could win absolutely nothing.

Anyone over the age of 16 can buy them, and grandparents who want to buy them on behalf of their grandchildren can nominate the parents to hold them.The minimum holding is £100 but each person – including children – can hold up to £40,000 in premium bonds, and you can opt to have winnings reinvested.

Every bond has an equal chance of winning so the more you own, the better your chances of winning. NS&I started awarding two £1 million top prizes every month from August. Sadly, however, the annual prize fund interest rate is just 1.35% and the odds per £1 unit of winning any prize is 26,000 to 1.


For parents who are in the fortunate position to have adequate pension provision themselves, the next step could be to start funding their children's retirement, says Tom McPhail, pensions expert with independent financial service provider Hargreaves Lansdown.

"For the past 100 years, the standard of living and personal wealth has, in general, improved steadily. But we are now witnessing an unfortunate phenomenon where the adequacy of pension provision for generations to come slips backwards," he says.

"By investing in a pension so early, parents and grandparents can make a huge input to their children's retirement planning: the effects of compounding over such a long period of time can make a very big difference. It can also be hugely beneficial for inheritance tax planning, because it takes money out of your estate."

Up to £3,600, including £780 in tax relief, can be contributed to a child's pension each tax year. McPhail says the long investment term lends itself to an adventurous investment strategy, with equity income funds "the very least risk you should take" and emerging markets a reasonable option.

However, there is one big drawback to putting money into a pension for your child. Currently, pensions cannot be drawn until the age of 55 but this will rise to 57 in 2028 and then be linked 10 years below the state pension age, according to plans revealed by Chancellor
George Osborne in July.Those in their early twenties now will not be able to access their pension until age 60, and for babies the delay is likely to be even longer.

What the experts have chosen for their own children

Martin Bamford, chartered financial planner, managing director of Informed Choice and father to Megan, aged seven, says: "My daughter Megan has had a child trust fund from The Children's Mutual, to which her grandparents have contributed each year since she was born. In addition, she has a Fidelity investment fund portfolio, which her mum and I contribute towards on a monthly basis.This is specifically designed to pay for her university education.

"We take the very long-term view of investing when it comes to both of these, with the child trust fund invested in Invesco Perpetual Income fund and her Fidelity portfolio in First State Global Emerging Market Leaders. As she gets closer to her 18th birthday, we will gradually reduce the risk taken with both of these accounts, moving them into cash closer to the time she needs to use the money for education or other purposes.

"She also has a cash savings account, which is funded on a less regular basis."

Patrick Connolly, certified financial planner with independent financial adviser Chase de Vere and father to Aidan, aged 12, says: "I save into a Junior Isa for Aidan, monthly premiums into the Jump savings plan which invests in the Witan Investment Trust.There isn't a particular reason for saving other than for his future. I hope he goes to university and, if so, the money can be used to help him with that. If he doesn't, then it can be used for another purpose.

"I chose the Witan Investment Trust because this is a diversified global equity fund which I ideally want to hold for him for the long term without having to chop and change. I'm not looking for a fund that will shoot the lights out but rather one that will produce consistent long-term returns."

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