This summer, parents will have been reminded just how expensive kids can be. But, as every mum and dad knows, the cost of raising children goes well beyond day trips and holidays.
Research from insurance company LV= shows that the cost of raising a child in the UK, from birth to the age of 21 was a staggering £231,843 in 2016, and that’s without the costs associated with a private education should you decide to pursue that route. It does, however, take university costs into consideration and points out the cost between the ages of 18 and 21 comes in at £53,445.
As such, coming up with a savings plan for your child’s future, sooner rather than later, is a sensible course of action. Grandparents and other family members may want to put money aside for them too.
Luckily, there’s no shortage of options. One of the most popular is the Junior Isa (JISA). You can put your money into cash, stocks and shares or a combination of the two and no tax is payable on your gains.
In the current tax year (2017/18), you can save up to £4,128 a year in a JISA. The money will be locked away until your child turns 18, at which point the fund rolls into an adult Isa and they can spend the money as they wish. The downside is that there is no guarantee that they will put it towards university fees or other ‘sensible’ investments and could blow the lot.
However, you don’t have to take out a plan that is specifically designed for children. If you want more control, you can take out a separate investment or savings plan in your own name and earmark it for your children.
This tax year, you can invest up to £20,000 in an ISA tax free – many parents will be unlikely to use their combined £40,000 allowance themselves, leaving them plenty of scope to put aside some of that for their children.
If you are a grandparent, you cannot open a JISA. If you prefer the cash to be held in the child’s name, you can set up a ‘bare trust’ or a ‘designated account’ (see below).
Funds to give your child a head start
Here, our panel of experts reveal their favourite funds to give your child or grandchild a financial head start.
Starting at the lower-risk end of the spectrum, these funds won’t shoot the lights out, but if you worry about losing money they shouldn’t give you any sleepless nights either.
Newton Real Return* (Five-year performance: 18%)
Dzmitry Lipski, head of funds at Interactive Investor, is a fan. He says: “Manager Ian Stewart’s approach in this fund is unconstrained and flexible, and he is able to use derivatives to provide downside protection. He holds a cautious view of the world and the fund is positioned accordingly. It maintains exposure to physical gold and its equity allocation is biased to defensive sectors such as consumer staples and healthcare, which should help to preserve capital and reduce volatility over the longer term.”
Investec Cautious Managed (Five-year performance: 39%)
This is the favoured low-risk option for Patrick Connolly, chartered financial planner at IFA Chase De Vere.
He says: “This multi-asset fund benefits from an experienced manager, Alastair Mundy, who invests in a wide range of investments including shares, fixed interest, gold and silver, which helps spread risk. He is focused on capital preservation, but isn’t afraid to make contrarian decisions.”
Jupiter Merlin Balanced (Five year performance: 64%)
As people saving for children tend to have a lengthy investment profile, Darius McDermott, managing director of Chelsea Financial Services, favours funds that invest more heavily in equities.
“The risk can be dialled down by investing in a fund that invests in more than one geography for diversification and can also invest in other assets should the manager be more cautious on the outlook,” he explains.
His favoured choice is Jupiter Merlin Balanced.
“This multi-manager fund can have between 40-85% in equities and aims to provide capital growth and a decent level of income (which can be reinvested for children). The team seeks to take advantage of short-term market movements that create opportunities, but also take defensive measures where appropriate. The team use their expertise to select who they believe to be the best fund managers in each asset class and region, with the aim of producing the best possible return in any given macroeconomic environment,” he adds.
Medium-risk funds typically don’t offer guarantees, but have the potential for better long-term returns than lower-risk funds, although the value of your investment could fall.
CF Woodford Equity Income* (Three-year** performance: 37%)
**Fund launched 2014.
Marlborough Special Situations (Five-year performance: 154%)
If you want to raise the risk profile, Mr McDermott says UK smaller companies are a good place to start: “Over the very long term they can be very rewarding, as today’s best smaller companies can become the large and mega caps in the future. Marlborough Special Situations is a great fund in this area with a long track record. It’s managed by the team at Hargreave Hale – one of the best small-cap boutiques in the country.
The fund has a small- and mid-cap focus and tends to be very diversified, with about 200 underlying stocks. It’s a great example of how powerful an active fund manager in small caps can be having compounded growth at 19% for almost 20 years: a cumulative return of 2,766% (as at 21 July 2017).”
Schroder QEP Global Core (Five-year performance: 106%)
Mr Connolly likes this fund because it provides a high level of diversification at low cost. “This fund spreads risks by investing in over 500 companies from around the world. It uses a very strict approach, which means it doesn’t take big bets and the returns are likely to be similar to the stockmarket index. Because of this, it is cheaper than most other managed funds. It charges just 0.4% a year,” he says.
Artemis Global Income* (Five-year performance: 124%)
Mr Lipski says: “The fund aims to offer investors a good, steady and rising income, as well as prospects for capital gains, by investing in profitable, dividend-paying companies worldwide. It is run by highly experienced manager Jacob de Tusch-Lec and benefits from a flexible investment approach that allows him to adapt to changing economic conditions by shifting investments between high-yielding quality, cyclical and value stocks.
He looks for companies that can keep growing their dividends. In terms of positioning, he favours Europe, where valuations are much cheaper and remains overweight in banks, which should benefit from a rising interest rate environment.”
Funds that invest in the higher risk sectors (typically emerging markets or specific themes), offer the greatest potential for long-term returns but the highest price fluctuations and risk to your money.
Stewart Investors Asia Pacific Leaders* (Five-year performance: 76%)
JPM Emerging Markets (Five-year performance: 55%)
Mr Connolly also looks overseas in this sector, saying: “This fund has one of the largest, most experienced and well-resourced emerging markets investment teams, with 39 managers and analysts. This breadth of knowledge is important to help manage risks and this is likely to be as close as investors can get to a safe pair of hands in what can be a volatile investment sector.”
Baillie Gifford Shin Nippon (BGS) (Five-year performance: 292%)
Mr McDermott has picked an investment trust. He says: “If you want to go all out for the potential of great long-term returns, this trust is worth a look. Shin Nippon focuses on emerging or disrupted sectors, where the manager sees innovative growth opportunities. The team is prepared to bide its time while these companies reach their full potential and, while the trust can be highly volatile, patient investors have been richly rewarded.”
Fidelity Emerging Markets* (Five-year performance 70%)
Mr Lipski says: “The fund aims to deliver long-term capital growth, primarily investing in areas experiencing rapid economic growth including South East Asia, Africa, Latin America, Eastern Europe and the Middle East. Its manager, Nick Price, seeks out high quality companies that can fund their own growth without relying on excessive debt or acquisitions and that can deliver sustainable returns.
What are bare trusts and designated accounts?
When you take out a savings plan for a child, you can arrange for it to be held in a ‘bare trust’. This means that while you will still manage the money, it will legally be owned by your named beneficiary. This has tax advantages. Any income tax payable on returns will be payable by the beneficiary, but as children rarely earn enough to pay income tax (with the same personal and savings allowances as adults) it’s unlikely to be an issue.
There is a catch for parents investing on behalf of their kids, however, in that if the child’s pot earns more than £100 a year, the tax liability will be returned to them (whether it’s in a bare trust or not).
Monies paid into bare trusts are potentially exempt transfers, which means they become free of inheritance tax if you live for seven years after the gift is made. The assets go to the child once they turn 18 (or 16 in Scotland).
Designated accounts offer more control but have fewer tax benefits. You designate the account to the child, but ownership of the money does not automatically pass to them when they turn 18 and you can manage the money for as long as you want. You’re responsible for any tax owed on the money and it will form part of your estate when you die, so IHT may be payable.
Long-term plan: pensions for kids
Starting a retirement plan for your newborn may seem a bit leftfield but, given the associated benefits and the time it has to grow, it could be a very sound investment. Not only will your child not pay any tax on it while its accruing, they’ll also enjoy tax relief on contributions. This effectively means it only costs £80 to invest £100. You can save a maximum of £3,600 a year, so to hit that limit you only need to invest £2,880. Your child won’t be able to access the money for their first home or tuition fees, but the tax breaks mean it’s a tempting option if you’ve already got these angles covered.
* Denotes the fund is a member of the Moneywise First 50 Funds for beginners. For further information, visit Moneywise’s First 50 Funds for Beginners.
Figures correct as of 7 August 2017.
This article was first published by our sister magazine Moneywise, available online here.
This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.