Investing for children normally comes about as a result of parents or grandparents wanting to help their children financially, to pay off their university fees or perhaps get on the property ladder.
Not often does a grandparent come to us looking to put money away for their grandchild’s 18th birthday party (although with some of the funds I’ve seen, that would be a pretty epic birthday party indeed)!
On a more serious note, when it comes to investing for children, particularly the ones under the age of 18, or maybe even before they are born, there aren’t many products that are available today.
Essentially, you can pick one of the two below to put money into for them:
- Junior ISAs
- Unit trusts
There are other products that you can repurpose for children, but they aren’t actually in their names, so we won’t be covering them in this blog.
For more information on those other products, feel free to contact Applewood Independent.
The most obvious of the two products I’ve highlighted would be the Junior ISAs. However, because the amounts that they contain (normally) are relatively small, not all providers have a Junior ISA to offer.
Even as an independent adviser with access to any provider out there, we still only have a very limited number from which to choose. That may sound bizarre, but many providers don’t want the administration cost of a Junior ISA.
A Junior ISA is basically a vehicle for the parents or grandparents to put aside money for when the child reaches 18. They can put in a maximum of £9,000 per year, per child.
It acts in much the same way as a normal ISA would for an adult, and when the child turns 18, the ISA becomes theirs to do with what they will.
The issue with Junior ISAs is that they can be worth a considerable amount of money by the time the child reaches 18, and many parents and grandparents don’t want their 18-year-old having sole responsibility over this large amount of money.
Even if you are only putting in £1,000 per year, over ten years, that’s a lot of cash that might be squandered if not managed correctly.
So, many of our clients who are thinking about investing for their children turn to option two, a unit trust.
Some investors have unit trusts of their own, as well as for their children, because you can set up a designation.
Essentially you can designate a unit trust to your child or grandchild so the unit trust is in the parents or grandparents name, and you don’t have to give it to them all at once when they reach 18.
In fact, you can give it to them at any point you like, or even not at all if you choose to!
This is a preferred option for many people as that money can sit in the unit trust, ready to be used for the child’s first home, or another meaningful purchase that’s going to help them. Also, another potential benefit of unit trusts is that there is no limit to how much you can deposit – it can be as big or as small as you want it to be.
How to make the most of your child’s investment
So those are your two products that are available for child investment, but what funds do you put into these products to make sure they are performing as well as they can as your child grows up?
If the child is under ten, and particularly if they are under five, I don’t see an issue in having the upper levels of risk applied to the funds we put into their products.
Although the past isn’t a guide to the future, we can safely say that at pretty much any stage in the last 10–25 years, our bigger, riskier portfolios have made more money than the smaller-risk ones. It won’t surprise you to hear that in the long term, ten-out-of-ten-risk portfolios are some of our best performers!
When you think about it over the long term, however, this makes sense. These portfolios have had the most exposure to equities and stock markets, which go up more than any other asset class. Again, there is no guarantee of that; it’s just how it has happened in the past.
If you are investing for a child, they aren’t going to see that money for the next ten years or more, which means you have the time for the market to rise, fall and recover again.
Where is the penalty paid for high risk?
Look at the tech bubble burst, one of the worst-case scenarios we have seen in our generation. The market went down for two and a half years, but then it recovered and rose for years after. What does two years of downfall matter to a well-diversified portfolio that has seen growth for the majority of those 10–15 years?
At Applewood Independent, only one year in the last ten has lost the riskier portfolios money (2018). In 2020, none of our growth portfolios lost money, and now the economy is recovering, it looks like it’s going to be another good year where they will potentially reap the rewards of being at higher risk.
So, over a period of 10–15 years, where has the penalty for the risk you have taken been paid?
You may lose a little bit more than a lower-risk portfolio in the downside, but the years of growth will more than make up for it, assuming the right experts are managing your portfolio.
Find that trusted independent adviser and reap the rewards
Investing for children is done in almost the same way as many other investments. However, because it’s not someone’s life savings, or a retirement income that is going to be needed tomorrow, we can potentially afford to have a more focused and slightly riskier portfolio that may maximise the amount of money you have at the end of that 15-year period, when your child is ready for it.
Although the past is not a guide for the future, if managed correctly, and your independent financial adviser is choosing the right funds for your child’s portfolio, you would have expected that money to have multiplied between two and five times over in the last 10–15 years, which is significantly better than having it sitting in the bank doing nothing for you or your children’s future.
I hope this has been useful, and if you have anything else to add, I’d love to hear from you. To find out more, feel free to get in touch by emailing firstname.lastname@example.org.
The views expressed in this article are those of the author and do not constitute financial advice. Applewood Independent Ltd is authorised and regulated by the Financial Conduct Authority. For financial advice designed for you and your specific circumstances, please contact the author using the contact details provided in this article or, alternatively, contact the Applewood Independent Ltd office on 01270 626555.
The value of your investment can go down as well as up, and you may not get back the full amount invested.
Past performance is not a guide to future performance.