Six ways to kick-start investing for your children

Putting some money aside for the kids is an item that’s perennially on parents’ to-do list, but often gets lost amid the day-to-day chores of life. Getting your offspring set up with investment accounts and starting to filter money in won’t take a huge amount of time – and could mean you hand them a sizeable savings pot when they turn 18.

Many parents who do start saving for their kids default to cash – 42% of the money put into Junior ISAs went into cash, government figures show*. But we know that over the long term investing is more likely to generate higher returns than cash. Over the past 10 years, £1,000 invested in a global tracker fund would have turned into £3,268, while that same £1,000 invested in the average cash ISA would have returned just £1,096**.

If you have plans to turn over a new leaf for the new tax year, here are some quick ways you can get started with investing to set your kid up for later life.

*According to HMRC ISA figures
**Investment figures based on Fidelity Index World and don’t include platform charges. Cash figures based on Bank of England average cash ISA rates. 

More on Junior ISAs

1. Pick the right account

When you’re starting out it might feel a bit confusing picking the right account. A Junior ISA is a good option for many parents: you can pay in up to £9,000 a year, the money is ring-fenced in the child’s name and it’s locked up until they turn 18. However, if you want a bit more flexibility or think you might want access to the money before your child’s 18th birthday, you could just save the money in your own ISA. It means you’ll have to use up some of your own £20,000 ISA allowance, but that is only an issue if you think you’ll max out that limit for your own savings. The money isn’t ring-fenced and you access it at any time – which is both a pro and a con. If you’re worried you might dip into the money it may be better in a Junior ISA, but if you want the flexibility to access it if you need to, it might be a good option.

Your longer-term option is a pension for your child: a Junior SIPP. You can save up to £2,880 in this account, which will get topped up with tax relief from the government to £3,600. But it’s a very long-term option, as your child won’t be able to access the money until they reach retirement age. But if you made just one contribution of £2,880 at birth and it grew by 5% a year, your child would have a pot worth £46,500 by the age of 57 – showing the magic of investment growth and compounding*.

*All investment figures based on 5% growth a year and don’t include charges.

2. Automate everything

Getting everything automated is a parent’s best friend – a bit like setting up direct debits to pay your bills or getting a regular subscription for your essentials, it means you don’t need to remember to invest each month.

You can easily set up automatic investments on most platforms, by arranging a direct debit from your bank account into your investment account, and then setting up a regular investment of that money into your investment(s) of choice. Many investment platforms will allow you to start regular investing from as little as £25 a month. You can always pause it one month if you need to skip a month, but it means you don’t have to actively log in and invest money every month.

As an added bonus, regular investing can also help protect against the danger of investing at a point in time when markets could be a little frothy, instead spreading your investments across the course of the year to smooth things out.

3. Track down lost accounts

You may have got started on your savings journey for your child years ago but left the account untouched or lost track of where the money is. If it’s in cash it means it’s very likely it won’t be earning much (if any) interest. Your first step should be to track down the paperwork and then you could consider transferring it into one place to make it easier to manage.

Parents of older children may also have a Child Trust Fund they’ve lost track of. These were accounts where the government contributed money, but often parents have forgotten about them or the provider doesn’t have up-to-date contact details. The government has a tracing service online so you can find out if you have an account and who it’s with. Once you’ve tracked it down you could transfer it into a Junior ISA, which will often have a broader investment choice and could have lower charges. If you’re transferring the child trust fund you need to move over the entire sum of money to a Junior ISA, you can’t have both types of account open at once.

4. Work out what you can afford

A Junior ISA has a very generous £9,000 annual limit and parents who can afford to put this away each year can quickly build up an impressive pot for their child. Someone who saved the full £9,000 each year from birth, who saw investment returns of 5% a year, would be handing their child a pot worth £266,000 on their 18th birthday. If you had even more money and could also max out their Junior SIPP each year from birth, you’d be handing them a combined pot worth £372,000 on their 18th birthday – although they obviously wouldn’t be able to access their pension at that point.

But those figures aren’t realistic for many parents – the average subscription to an investment ISA is £1,800 a year*. Instead you should work out what you can afford to put away each month or year and build up from there, where you get more spare money. It might be that in the early years you can’t afford much each month, but once nursery and nappy costs are a thing of the past you could increase your contributions.

Even saving £25 a month from birth means you’d have a pot worth almost £9,000 by their 18th birthday, assuming 5% a year investment growth. But upping that to £50 a month from their fifth birthday means they’d have £15,000 by their 18th birthday, assuming that same 5% a year growth. Even if you’re starting a bit later, when your child is older, you can still build up a decent pot: £100 a month saved from their 10th birthday gives them a pot worth £12,000 by the age of 18.

*According to HMRC ISA figures

5. Get grandparents, friends and family involved

While a parent or guardian will need to open a Junior ISA, once the account is open other people can easily pay money in. It means that you can enlist grandparents or other family and friends to top-up the pot and boost your child’s investments. They can make a one-off payment, for a birthday or Christmas for example, or they can set up a regular monthly investment. You’ll just need to make sure that your collective contributions don’t exceed £9,000 per child per tax year.

6. Select your investments

When it comes to picking investments the first question is whether you want to pick the stocks yourself or outsource that task to a fund. If you opt for funds, you’ll want to weigh up using an active fund manager or a passive fund. There’s no right answer to this, it comes down to preference. Put simply, a passive investment approach will cost you less but will only track the performance of the market – never outperform it. With active management you’re paying more to have a fund manager pick stocks for you, but the hope is that this will generate a higher return.

There’s no need to sit entirely in one camp, you could mix the two approaches. For example, having a broader UK stock market tracker and then using an active fund for a more specialist area. Another option is to pick an all-in-one fund, which can be active or passive and which invests in a mixture of different assets, meaning you only need invest in one fund that is already diversified, rather than picking lots of different investments.

When investing for your children it’s important to think about the timeframe. If they are young, you could have up to 18 years until they will access the money. This makes for a decent investment horizon and means you could potentially take more risk with the money, as you have time to ride out the ups and downs of the market. Conversely, if your child is closer to 18 you might want to take less risk or even stick to cash. Of course, some parents would prefer to play it safe with their children’s savings regardless of their age – it’s down to personal preference and attitude to risk.

More on ISAs