Children are growing up in an uncertain world, as current geopolitical tumult and extreme weather events demonstrate, which means their parents have plenty to fret about.

However, one step parents can take to help them sleep better at night is to ensure their kids’ financial futures are as secure as they can be by paying into a long-term savings product. Kids grow up fast, yet so too could their money with the help of a Junior SIPP or Junior ISA.

If you start early, save often and trust in the power of compounding, even relatively small monthly contributions can morph into a tidy nest egg by the time your son or daughter turns 18, in the case of a Junior ISA, or reaches retirement, in the case of a Junior SIPP.

In the case of the former, this nest egg can help to fund everything from a deposit on a house to driving lessons or university costs.

ABOUT JUNIOR ISAS AND JUNIOR SIPPS

If your child is under 18, up to £2,880 a year can be paid into a Junior SIPP on their behalf and the government will instantly top it up with a 20% bonus, to a maximum of £3,600.

Just like a regular SIPP, any investment growth the fund delivers will be tax-free with the money accessible when your child reaches the UK’s ‘normal minimum pension age’ (NMPA), currently set at 55 and due to rise to 57 in 2028, with further increases possible before your child gets there. The tax treatment of withdrawals is also the same as a regular SIPP, with 25% available tax-free and the rest taxed in the same way as income.

You can save up to £9,000 a year in a Junior ISA, which can be based in cash or stocks and shares, although unlike a Junior SIPP there is no upfront government bonus. Investment growth is tax-free, and your child can take over managing the account from age 16.

While £9,000 a year might beyond a lot of us, if you could squirrel away £1,000 a year, over an 18-year period and assuming a return from the markets of 5%, Shares’ calculations suggest
your child would still end up with a tidy sum of more than £25,000, with more than £8,500 of this made up of tax-free investment returns.

They won’t be able to access funds until they reach their 18th birthday, at which point the Junior ISA will convert to a regular adult ISA. Any withdrawals they make will be tax free, but it’s important to note you will no longer have any control over what they do with the funds.

So a key risk with a Junior ISA is that the recipient goes on a spending spree on their 18th birthday. The entire portfolio could be liquidated with no thought given to the effort made by parents over many years to give their son or daughter a head start in adult life.

If you are overly worried about your child gaining control of the money at 18 and spending it all in one go, you could open an ISA in your name and then control when your kid receives the money.

TIME IS ON THEIR SIDE

As a parent investing for young children, you have the benefit of a long-term investment horizon and don’t need to concern yourself too much with volatility or short-term market fluctuations. Be prepared to expose Junior ISA portfolios to plenty of risk as the investment timeframe is relatively long, although a conservative approach is understandable if you don’t want to risk your money losing value or there’s only a short time until the child turns 18 and wants the cash.

Equities tend to outperform other asset classes over the long term and should be your first port of call, with portfolio funds gradually shifting into less volatile assets as the child gets closer to 18.

Deciding whether to pay into a Junior SIPP or Junior ISA on your child’s behalf is tricky and depends in part on your priorities. If you want to give them an easily accessible pot of money from age 18 which could be used towards a house deposit, for example, then a Junior ISA might be preferable.

Conversely, if you prefer to look more long term and turbo-charge their retirement savings, then a Junior SIPP might be the best option. And just like with regular SIPPs and ISAs, you might decide that a combination of a Junior ISA pot and a longer-term Junior SIPP pot is the most appropriate solution.

LOOKING FOR IDEAS

When it comes to picking individual stocks, there is logic in putting money to work in products or services that your kids are interested in and spend money on, since this will also engage your children in the saving and investment process and ensure these businesses are future-proofed by catering to the consumers of tomorrow.

Shares highlights two stocks and a low-cost ETF below, but here are some other examples of businesses with a youthful customer base.

Children and teenagers are hooked on Facebook, owner of two of the most engaging social media apps in the world – Facebook and Instagram – as well as two of the biggest messaging apps, WhatsApp and Messenger. It makes money by displaying advertisements to users while they browse through feeds of photos and videos.

Younger children may well be devotees of the likes of Mattel, the toy products company behind Barbie, Hot Wheels and Fisher-Price.

Newly-listed US gaming group Roblox, is a kids’ gaming platform where players can interact with each other through Lego-style avatars within various games. Roblox was a beneficiary of lockdown with young people stuck indoors, but daily active users are growing post the pandemic too.

On the UK stock market, video games outfit Team17 (TM17:AIM) and fantasy games publisher Frontier Developments (FDEV:AIM) are exposed to a booming gaming industry, or your kids may be avid fans of the fantasy miniatures made by Games                                       Workshop (GAW).

Also meriting mention are online fashion retailers which appeal to the younger demographic, namely ASOS (ASC:AIM) and Boohoo (BOO:AIM), not to mention recent stock market entrant In The Style (ITS:AIM), the digital womenswear fashion brand which collaborates with social media influencers to stoke demand for its collections.

KEY PICKS

JD Sports Fashion (JD.) 967p 

Shares believes it is well worth paying up to put retail star turn JD Sports Fashion (JD.) in a Junior SIPP or Junior ISA, despite the shares trading on a rich prospective price/earnings multiple of 24.8 for the year to January 2022 and 21.1 times based on earnings estimates for fiscal 2023 based on Refinitiv Eikon data. One of the retail sector’s quality names, JD Sports Fashion has successfully tapped into the ‘athleisure’ boom among youthful gym-goers and fashion-savvy consumers and is on track to deliver increased pre-tax profits of no less than £550 million in the current year. JD Sports should continue to do well as teenagers look to refresh their personal style post-pandemic, although having built its success on close ties with Nike and other powerhouse sportswear brands, the fact the likes of Nike and Adidas are successfully focusing on direct-to-consumer sales presents a longer-term risk.

Hasbro $97.1 

Parents seeking to stoke their kids’ interest in investing could put some money into global play and entertainment company Hasbro, trading on roughly 20 times forecast 2021 earnings with a healthy free cash flow yield of 5.4% according to Refinitiv Eikon. With consumer products including spanning toys, games, entertainment and digital gaming, Hasbro is the business behind well-known brands such as Transformers, Nerf, and Monopoly. It also has stakes in Discovery Family, which offers programming from Hasbro Studios, and animation studio Boulder Media, while the 2019 acquisition of Entertainment One brought popular children’s properties Peppa Pig and PJ Masks into the fold. Hasbro recently delivered (26 Jul) excellent second quarter results showing revenues up 54% year-on-year to $1.32 billion with adjusted operating profit more than quadrupled to $211.6 million.

VanEck Vectors Video Gaming and eSports UCIT ETF (ESGB) £28.74

Charges eat into returns over the long-term, so it is definitely worth adding a low-cost exchange-traded fund (ETF) to your Junior SIPP or Junior ISA. One passive fund offering a play on childrens’ and teenagers’ pursuits is the VanEck Vectors Video Gaming and eSports UCITS ETF (ESGB), which seeks to replicate, before fees and expenses, the price and yield performance of the MVIS Global Video Gaming and eSports Index. Top holdings include Nvidia, the Nasdaq-listed semiconductor designer best-known for providing advanced microchips for graphics-heavy computer gaming, as well as rival chips designer Advanced Micro Devices. Other leading holdings include SEA, South-East Asia’s successful online gaming and commerce firm, as well as Chinese internet titan Tencent, which is taking over UK video games developer Sumo (SUMO:AIM) for £919 million. The ETF has an ongoing charge of 0.55%.

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