Funds to secure your kids' futures

Published by on 31 August 2010.
Last updated on 27 September 2010

family with adviser

University fees, first car, mortgage deposit or a gap year spent travelling around the world – whatever your child ends up doing when they grow up it's going to cost plenty of money.

One way to take some of the pain out of these future bills is with an investment strategy. As long as you've got more than five years to spare, putting your money into stockmarket-based investments is worth considering.

"You can take advantage of the potentially higher returns available through riskier investments such as equities, compared with the poor returns currently available on cash," says Lee Smythe, managing director of Killik Chartered Financial Planners. "But switch into less risky assets as the event you're investing for approaches."

With time on your side, you can afford to take more risk with your child's investments, so you should look for funds that have a global or emerging market presence, says Andy Parsons, advice team manager at The Share Centre.

To support his view on emerging markets he points to the performance of the MSCI Emerging Markets Index compared with that of the FTSE 100.

Over a 10-year period to 29 July 2010, while the FTSE 100 increased by 18.05%, the MSCI Emerging Markets Index grew by 187.29%.

While you could invest in individual shares on behalf of a child, one of the best ways to invest is through a collective investment such as a unit trust, open-ended investment company (OEIC) or investment trust.

This is because your money is spread across a number of shares, reducing the risk of losing it all.

Choices, choices

There are more than 2,000 such funds to choose from, ranging from funds investing in UK blue chips or gilts (government bonds) and corporate bonds, through to emerging markets and technology.

You'll pay an initial charge when you invest in unit trusts and OEICs, which could be up to 6%, plus there's an annual charge of up to 1.75%. 

However, while investment trusts are bought through stockbrokers, you can buy and sell unit trusts and OEICs direct or through a discount broker or fund supermarket – where you'll benefit from heavily reduced initial charges. 

Friendly society bonds are another equity-based product that can be packaged for children. These allow you to invest £25 a month or £270 a year and, providing you invest for at least 10 years, the proceeds will be tax-free.

But many financial advisers are sceptical about friendly society bonds. "We don't recommend them," says Patrick Connolly, spokesperson for AWD Chase de Vere. "These products typically have high charges, are inflexible and perform poorly."

You can even take out a pension on your child's behalf, taking advantage of the annual pension contribution of £3,600 gross.

"The money won't be available until they reach at least 55 under the current rules, but contributions benefit from 20% tax relief at source, meaning each £80 saved becomes £100 – an instant return of 25%," says Smythe.

Tying your child's money up in a pension until they're 55-plus may seem a harsh idea, but it does get round the issue of whether or not they'll squander their money once they get their hands on it.

With all the other forms of investment, however, you can invest through either a designated account (in your name but with your child's initials attached) or a bare trust in the child's name – which means they'll be entitled to the money when they reach age 18.

Plumping for the bare trust option has tax benefits. If you hold the investment in a designated account it's taxed as your investment, while putting it in a bare trust means, unless it generates more than £100 of income from money from a parent, it's taxed as the child's.

But Smythe recommends keeping investments in your name: "If you invest in the child's name, they are entitled to it at 18. I'd always urge parents to invest in their own name, so they have the funds available either as a gift for their children, or to use as and when they think appropriate."

Fund recommendations

Andy Parsons, advice team manager at The Share Centre, recommends global, diversified emerging market or concentrated emerging market exposure, tipping M&G Global Basics, Aberdeen Emerging Markets and Allianz RMC BRIC Stars

Patrick Connolly, spokesperson for AWD Chase de Vere, recommends M&G for investments for children. "M&G allows investments from as little as £10 a month," he explains.

"We like M&G Global Basics, M&G Global Leaders and M&G Global Growth. They're consistent performers and well diversified internationally."

Lee Smythe, managing director of Killik Chartered Financial Planners, says: "I'd recommend the Troy Asset Management Trojan fund and the Artemis Strategic Assets funds for broad-based exposure across a number of asset classes."

Additionally, for those who want to make a more speculative long-term equity investment, he suggests Lazard Emerging Markets fund and the First State Asia Pacific Leaders fund.

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