Investing for your children and grandchildren

With the ever-increasing financial challenges faced by the younger generation, parents and grandparents often find themselves wondering how they can invest for their children’s futures. 

Whatever hopes and dreams you have for your children or grandchildren, it’s reassuring to know you can take steps now to help put them on the path to achieving their goals. Perhaps your goal may be to help them purchase their first home or contribute towards the rising costs of further education; taking small steps whilst children are young can help enormously towards achieving these goals. 

The cost of holding cash

Today’s low interest rate environment has created challenges for investors looking for adequate returns on savings, particularly for the younger generation. Whilst cash may seem like the safe option, the negligible interest rates currently available for savings, coupled with inflation, has exposed the true cost of holding cash. 

The power of compounding

An alternative to cash is to invest designated savings to give your children or grandchildren a head-start in their investing career. The old adage of ‘Time in the market rather than timing the market’ holds true, particularly for the younger generation for whom compounding can be their greatest asset.
The power of compounding can be easy to overlook. However, regularly investing small sums whilst letting the funds compound over the long term can make a monumental difference to a savings pot for your children or grandchildren. 

For example, a one-off lump sum of £10,000 invested when a child is first born could grow to nearly £28,000 by the time the child turns 21, or over £186,000 by the time they reach 60, assuming a growth rate of 5% per year net of fees.*

Possible investment vehicles

There are a variety of ways to invest for both children and grandchildren, depending on the quantum of funds you wish to invest and the level of control you would like to retain over how and when the funds are accessed.
 

1. Junior ISA

   For children under 18, a Junior Stocks & Shares ISA is a popular choice. Under the 2021/22 tax rules, up to £9,000 can be invested in a Junior ISA each year, with no tax payable on the interest, dividends or gains accrued. Whilst the account needs to be opened by a parent or legal guardian, once open anyone can add funds to it, including grandparents or other family members.

   Investing the maximum £9,000 into a Junior Stocks & Shares ISA for 18 years could result in a pot valued at c.£288,000, assuming a growth rate of 5% each year, net of fees (assuming the annual JISA allowance remains at £9,000 throughout this period).*

   One potential area for consideration for those thinking about a Junior ISA is that the minor will become fully entitled to the funds upon reaching 18, when the Junior ISA will automatically convert to an ISA in their sole name. If giving a young adult unfettered access to a substantial amount of money is a concern, there are alternative investment vehicles which can be considered.
    

2. Pension

   If you wish to consider a longer-term investment vehicle, then pensions are one of the most tax efficient investment vehicles available for savers. A SIPP or a Stakeholder pension can be an extremely tax efficient way of investing for children or grandchildren. Whilst contributions are limited to £2,880 per year for children and non-taxpayers, pensions have the added advantage of receiving an additional 20% top-up from the government in the form of basic rate tax relief (i.e. £720 based on a contribution of £2,880). 

   The overarching benefit of a pension is the long-term investment horizon, with access limited until the beneficiary reaches age 57. The long-term investment horizon provides an opportunity to invest funds in higher risk investments, thereby targeting a possible higher return over the long term. This, coupled with the benefit of compounding, can build a significant nest egg for young savers to help them in later life. 
    

3. Trust Planning

   If your principal objective is to gift larger sums of money to your children or grandchildren, trust planning can be considered. Trusts can be useful vehicles for transferring wealth to the younger generation, whilst enabling you to retain control of the assets should you wish to do so, even after your death. Effective trust planning also has the added benefit of potentially reducing your estate for Inheritance Tax purposes. 

   Trusts can be administratively simple to set up, but careful consideration should be given when considering your overall financial objectives, including who you would like to benefit, when, and how much control you wish to retain of the assets. 
    

Speak to your wealth advisor today to discuss the various savings vehicles and investment options available and how these can be used to give your children and grandchildren a head-start in achieving their financial goals.

*This projection is intended for illustration purposes only. The assumed growth rate is not based on actual past performance and is not an indication of anticipated future performance. The illustrated return is based on a 5% growth rate per annum after all costs and charges. Returns are not guaranteed.