How to give your children’s finances a kick start

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You could build a £100,000 portfolio by investing in equities through a Junior ISA

Investing a relatively small amount of money can make a huge difference to your children’s financial security in later life.

One of the best ways to invest is through a Junior ISA. Income and capital gains are tax-free and your child can’t withdraw any money until they turn 18.

There are cash versions of Junior ISAs but the interest rates are extremely low. If you want to beat inflation and grow money over time, you need to choose the stocks and shares version.

Start investing early

The earlier you start investing, the better. Figures from financial advice firm Addidi Wealth show that if you opened a Junior ISA at birth and invested £4,128 a year (the current maximum allowance) the portfolio would be worth £110,099 by the time the child reached 18, assuming an annual growth rate of 4%. Were you to delay by five years, the portfolio would be worth £71,381.

Investing from birth to age 18 provides plenty of time to ride out any stock market volatility. This means you can take on an increased level of risk, which can help to boost long-term returns.

Where to invest

Charlie Musson, spokesperson for AJ Bell Youinvest, suggests building a portfolio that gives exposure to exciting growth areas across the world, combined with a solid core that can be left to grow over time.

For the core of the portfolio, he recommends Fidelity Index World (GB00BLT1YP39). It tracks the MSCI World Index, giving exposure to the biggest and best known companies in the world. Its ongoing charge is just 0.15%.

You could then add smaller exposures to funds like Liontrust Special Situations (GB00B57H4F11), which aims to identify companies with a sustainable competitive advantage; and Invesco Perpetual Asian (GB00BJ04DS38), which offers exposure to a wide range of Asian companies.

Another fund worth looking at is Polar Capital Global Technology (IE00B42W4J83). ‘Technology shares have had a fantastic run recently, however with such a long time horizon, I’m comfortable investing in this area accepting that it may well be volatile,’ says Musson.

If you’re worried about the world your kids may grow up in, you might want to consider ethical and sustainable funds.

Anna Sofat, managing director at Addidi Wealth, likes Jupiter Ecology (GB00B7W6PR65), which screens companies against strict in-house ethical criteria; and F&C Responsible Global Equity (GB0033145045), which seeks to invest in companies that make a positive contribution to society and avoids those that harm the world, its people or its wildlife.

If you start investing later in your child’s life and expect them to access funds at age 18, the level of risk taken will need to be lowered accordingly.

Tax breaks

It’s possible to invest on behalf of your kids outside of a Junior ISA but you won’t benefit from the tax breaks. Normally, if a parent gives money to a child that generates more than £100 a year in interest, tax is paid at the parent’s marginal rate. This isn’t the case when it comes to a Junior ISA – all the interest earned is free from tax.

Additionally, if the portfolio grows significantly over time it could trigger a tax liability when the money is passed from the parent to the child at age 18. A Junior ISA avoids this because it automatically converts to a normal ISA with the same tax advantages when the child turns 18.

How to stop a spending spree

One worry of investing in a Junior ISA is that your children may decide to blow the lot when they get access to the money at age 18.

Sofat says she’s come across parents who don’t tell their kids about their Junior ISA, but she doesn’t think this is necessarily the best approach.

‘Part of the whole savings process is to teach children to be savvy about money,’ she explains. ‘Once they reach their teenage years you could consider having regular meetings to discuss what they have. This helps to create a responsible attitude towards money, and hopefully there’s more chance they’ll use it for something like university fees.’

Junior SIPPs

Another way of ensuring your children don’t spend your hard-earned investment is to pay money into a Junior SIPP (Self-Invested Personal Pension). Your kids won’t be able to access the funds until they are at least 55 under current rules.

You can pay in up to £2,880 a year into a Junior SIPP and the government will add tax relief of 20% to make this up to £3,600. The investment time horizon in a Junior SIPP is extremely long which means you may wish to opt for higher-risk assets.

Sofat says Junior SIPPs can be a good way of introducing your children to long-term financial planning.

‘It’s an easier way to sell a pension than introducing the concept when they’re in their 20s because they can already see some momentum. Even £50 or £100 a month can make a huge difference,’ she says.

The choice between using a Junior ISA and a Junior SIPP comes down to your objectives.

‘The chances are your children will have the most need for the funds as they make the transition from child to adult, so a Junior ISA can help give them a great start to their adult life,’ says Musson. ‘By the time they are 55 hopefully they will have built their own wealth, particularly if they have seen the value in long-term savings through their Junior ISA.’