Investing for Your Child: Secure Your Kids’ Financial Future

Investing for Your Children

As a parent, securing your child’s financial future should be a top priority, yet finance is something we don’t really talk about in this country.

We really should.

While the costs of raising children can be substantial, setting aside funds for their long-term benefit is a wise and rewarding endeavour.

I’m passionate about finance, especially where my kids’ future is concerned, which is why I have written this guide exploring the most effective strategies for parents to invest for their children. I will cover everything from account options to investment choices and practical tips for success.

*Before we get into the details, it’s important to note that this article is for informational purposes only and does not constitute financial advice. Always consult with a qualified financial advisor before making investment decisions if you are not comfortable making those decisions alone.*

Investing for Your Children Has Never Been More Important

The world is becoming more expensive and we all know the cost of the state pension is a burden the Government could do without.

Investing for your children has therefore never been more important.

An interesting theoretical experiment showed that if a child is given £5,000 at birth and that is invested across the whole market, assuming an 8% annual increase which is what has happened historically, that child would have over £1 million when they reached the age of 65.

This is the power of investing over the long term.

By starting early, you can:

  • Harness the power of compound interest over a longer time horizon
  • Instil valuable financial literacy skills in your children
  • Provide a financial cushion for major life events, such as university education or a first home purchase
  • Potentially reduce your own financial burden in supporting your child later in life

Obviously, not many people have a spare £5k lying around, but even small amounts can have a big impact.

While the prospect of investing may seem daunting, small regular contributions can grow significantly over time. Let’s explore the various options available to UK parents for investing in their children’s future.

Choosing the Right Account

Choosing an Investment Account

Selecting an appropriate investment account is crucial for maximising returns and tax efficiency. Here are some of the most popular options:

Junior Individual Savings Account (JISA)

JISAs are tax-efficient savings and investment accounts designed specifically for children under 18. Key features include:

  • Annual contribution limit of £9,000 (as of the 2023/24 tax year)
  • No tax on interest, dividends, or capital gains
  • Available as cash or stocks and shares JISAs (or a combination of both)
  • Funds locked until the child turns 18
  • Only the child can access the money at 18

Child Trust Fund (CTF)

While no longer available for new accounts, existing CTFs can still be contributed to until the child turns 18. Parents can also transfer CTFs to JISAs for potentially better investment options and rates.

Junior Self-Invested Personal Pension (JSIPP)

For those thinking extremely long-term, you can set up a pension for your child. These have a lot of benefits but the money is locked away for a very long time.

But then, that’s the whole point of a retirement fund.

JSIPPs offer:

  • Tax relief on contributions (up to £3,600 gross per year)
  • Potential for significant growth over decades
  • Funds inaccessible until the child’s retirement age (currently 55, rising to 57 in 2028)

Parent’s ISA

Using your own ISA allowance to save for your child offers more flexibility:

  • Higher annual allowance (£20,000 as of 2023/24)
  • You retain control of the funds
  • Can be accessed at any time if needed

Saving Cash vs. Investments: Making the Right Choice

When saving for children, many parents default to cash savings. However, investing in stocks and shares often provides better long-term returns, especially when saving over many years.

Consider these factors:

Advantages of Cash Savings

  • Capital protection (up to £85,000 per institution under FSCS)
  • Predictable but usually lower returns
  • Easy access (for accounts not locked until age 18)

Benefits of Stock Market Investments

  • Potential for higher long-term returns
  • Opportunity to beat inflation
  • Teaches children about investing and financial markets

For younger children with a longer time horizon, a higher allocation to stocks and shares may be appropriate. As they approach 18, you might consider gradually shifting to less volatile investments or cash, or encourage them to stay invested for longer.

Building a Diversified Portfolio

Investment Portfolio

When investing for your child, diversification is key to managing risk. I will cover the easiest way to do this shortly (and it really is easy, I promise), but first lets make sure you understand the most common asset classes.

Equities (Stocks and Shares)

  • Offer potential for high long-term growth
  • Can be volatile in the short term
  • Consider a mix of UK and international stocks

Bonds

  • Generally less volatile than equities
  • Provide regular income
  • Can help balance overall portfolio risk

Property

  • Offers potential for capital growth and income
  • Can be accessed through property funds or REITs
  • Provides diversification from traditional stocks and bonds

Cash and Cash Equivalents

  • Provides stability and liquidity
  • Allows you to take advantage of market crashes
  • Important for short-term goals or as children approach 18

Selecting Investment Vehicles

Once you’ve decided on an asset allocation, you’ll need to choose how to invest. Happily, investment companies have lots of options packaged up and ready to go, saving you an awful lot of work.

This basically means they have pooled the money of all of their clients, then used it to buy a huge number of individual stocks. The allocation is constantly adjusted, but for you, it means you can cover lots of different individual stocks and asset classes in a single investment.

Index Funds and ETFs

A fund designed to track an index, such as the FTSE 100. They will hold the right amount of each stock in the index to mimic its market performance.

  • Low-cost way to track market performance
  • Provide broad diversification
  • Suitable for passive investment strategies

Actively Managed Funds

A fund manager will actively attempt to beat the market by buying and selling specific stocks they think will go up or down.

  • Aim to outperform the market
  • Higher fees than index funds
  • Require more research and monitoring

Individual Stocks

If you felt strongly about a particular company you could buy shares in it directly when you thought it was cheap and sell it once it went up in value. Of course, things might not work out the way you hope and you could lose your money.

  • Potential for high returns
  • Require significant research and carry more risk
  • Best suited for experienced investors

Ready-Made Portfolios

Similar to a fund but with far more assets included. May include thousands of stocks from around the whole world. May be targeted to only include companies that are ethical, or be more heavily weight to the developed world, or emerging markets.

  • Professionally managed, diversified portfolios
  • Often aligned with specific risk profiles
  • Convenient for hands-off investors

Practical Tips for Successful Investing

Investing Success

To make the most of your child’s investments, consider these strategies:

Start Early

The power of compound interest means that even small contributions can grow significantly over time. Starting when your child is young maximises this effect.

Automate Your Investments

Set up regular monthly contributions to ensure consistent investing, regardless of market conditions. This approach, known as pound-cost averaging, can help smooth out market volatility. Also known as setting and forgetting.

Review and Rebalance

Periodically review your child’s investment portfolio and rebalance if necessary to maintain your desired asset allocation.

Involve Your Child

As they get older, involve your child in discussions about their investments. This can be an excellent opportunity to teach financial literacy and responsible money management. You don’t want them to blow it all on holidays when they finally get hold of the money.

Consider Tax Implications

Be aware of potential tax consequences, especially when investing outside of tax-efficient accounts like JISAs.

Understanding and Managing Risk

Managing Risk

All investments carry some level of risk. Your best protection against risk is time.

Did you know that 99% of Warren Buffet’s net worth (the world’s most successful investor) was made after he turned 65? It’s because he had been investing since he was 11 and never stopped.

Market crashes happen on average every 7 years, but riding them out is the key to surviving them. In fact, you should be investing more during a crash if you can, because then when the market recovers your investments will be worth more.

Nevertheless, it’s important to understand and manage the various different risks effectively:

Market Risk

  • The risk of overall market declines affecting your investments
  • Mitigate through diversification and long-term investing

Inflation Risk

  • The risk that your investments won’t keep pace with inflation
  • Address by including growth-oriented investments in your portfolio

Liquidity Risk

  • The risk of not being able to access funds when needed
  • Manage by maintaining some cash or easily sold investments

Common Mistakes to Avoid

When investing for your child, be wary of these common pitfalls:

  • Neglecting to start early due to small contribution amounts
  • Over-conservatism in investment choices for young children
  • Failing to involve children in financial discussions as they grow older
  • Ignoring fees and charges, which can significantly impact long-term returns
  • Attempting to time the market rather than investing regularly

Building a Secure Financial Future

Investing for your child’s future is one of the most impactful financial decisions you can make as a parent. In many ways, it’s the greatest gift you can give them. They won’t appreciate it until you are an old man (or dead), but you will know what you have done.

By starting early, choosing appropriate investment vehicles, and maintaining a disciplined approach, you can provide your child with a significant financial head start in life.

Remember, every family’s situation is unique, and there’s no one-size-fits-all approach to investing for children. Consider consulting with a qualified financial advisor to develop a strategy tailored to your specific circumstances and goals if you are unsure of what direction to take.

By taking proactive steps today, you’re not just building wealth for your child – you’re also imparting valuable financial lessons that will serve them well throughout their lives.