Investment trusts can be a useful tool when you’re saving for your children. We explain how
Considering the costs young people soon come up against, from university fees to getting a foot on the property ladder, it makes sense to have sound financial foundations in place.
The extra growth potential of investment trusts, in comparison to open-ended funds, makes them well suited for those investing on behalf of children, according to Patrick Connolly, a chartered financial planner at Chase de Vere.
“They have a longer-term time horizon and will often be making regular investments, which helps negate market-timing risks,” he says.
“I invest on behalf of my son into the BMO Junior Isa, which invests in the F&C Investment Trust*, for these very reasons.”
The F&C Investment Trust invests in a wide range of global shares.
How to invest
Investing in equities is a sensible approach if you have time on your side and can afford to ride out short-term market volatility.
As you get closer to your child’s 18th birthday, or the date of the investment objective, you could consider scaling back risk levels to avoid being forced to sell when markets have dipped.
A regular investment each month is a good idea as you benefit from ‘pound cost averaging’. This sees you buy a different number of shares each month, depending on the fluctuating share price of the trust and helps smooth investment risk over time.
Dennis Hall, founder of Yellowtail Financial Planning, advises parents to “go for growth rather than income and maybe consider smaller companies”.
He says: “Because children have their entire working life ahead of them, you can arguably take more risk than you might with your own money because children have greater capacity to recover from sharp drops in value.”
How to hold the investments
Junior individual savings accounts (Jisas) are special savings accounts for children, which have a number of attractive tax benefits. For example, children won’t pay any income tax on dividends or interest, or capital gains tax when the shares are sold.
In addition, family and friends can contribute up to £4,260 in the 2018/19 tax year, increasing to £4,368 from April. The investments that you can buy and hold inside the account (which includes investment trusts) belong to your children but can’t be accessed by them until they turn 18. At this stage, the account will convert into a regular Stocks & Shares Isa.
Several investment trust providers promote savings plans for children, often with low entry-level amounts, typically £100 for lump sums or £30 a month for regular savings.
You can set these up as a bare trust, in which shares are legally held for the benefit of your children. Once the money is in the trust, it can’t be changed, and you won’t have any entitlement to the income or growth. Income tax and capital gains tax are charged to the child or children.
Alternatively, you can use a designated account. The investment trust shares will be held in your own name but designated as being for your children. The benefit is keeping control over the investments and being able to decide when to hand them over, although you will also be liable for any income or capital gains tax liability.
Setting up a more formal trust will provide you with more control over what your children can do with the money. However, these can be complicated, expensive and require legal advice.
*A member of Moneywise First 50 Funds for beginners