What is the greatest gift a parent can give their child? "The gift of life" I hear you say or teaching them to read and write or eat well or even support Manchester United. Okay I'll give you that, especially the last one.
But one of the greatest gifts a parent can give their child is a financial head start in life.
Think about what today's youngsters will have to deal with in early adulthood: tens of thousands of pounds of higher education cost, a 10% deposit on their first home, many thousands of pounds on a wedding, or even simply buying their first car. And as for the mobile phone bills…
Stakeholder Pension
So how best to save for my child? Surprisingly the most tax efficient home for savings is a stakeholder pension. £100 contributed becomes £125 overnight and then grows in a very tax efficient environment. If child benefit is invested for even only the first 10 years of a child's life, then by the time they reach age 55 they will have £256,000 to spend. But most parents consider this a little too innovative and the money is totally tied up until age 55.
Junior ISA
Next in order of tax efficiency is a Junior ISA. Any UK resident under 18 who does not have a Child Trust Fund (broadly, children between ages 2 and 10 have CTFs) can have one and they can have both cash and stocks and shares versions. Total annual contribution per child is £3,600. Withdrawals are only permitted after age 18.
And there lies the danger: firstly if money is needed before age 18, they can’t have it, unless terminally ill. So it’s tied up and that life changing school trip to New Zealand, simply can’t be paid from a JISA. Likewise if parents need it...it’s a no no.
The second problem is that the money is available to the child at age 18. Now I am a responsible member of society now. At age 18 I was not. At age 18 with a few thousand pounds available to me from my junior ISA I would have been camped out in Ibiza until the money runs out. The child has an absolute right to the money and no parent can stop it other than hiding the evidence.
Child Trust Fund
The situation is even worse with Child Trust Funds because every eligible child has one and knows it becomes theirs to do with what they will at age 18. There will be some partying in the UK in 8 years time! It was a great idea from Gordon Brown very poorly executed.
So if you feel confident that your child will be a responsible member of society at age 18, or that you can deceive them into not knowing about the existence of the ISA, then this is the right choice for you.
Each person is different but for my children I will be investing in the stocks and shares version of the Junior ISA, with a balanced approach to risk, spread across UK equities, global equities, property, and even some corporate bonds. The likelihood over 18 years of this kind of portfolio performing better than simple cash, is very strong. But, and I repeat but, it is not guaranteed and you need to have your eyes open when making this kind of decision.
If, like me, you believe your children may be normal at age 18 and keen to party, then it may be wise to stay away from the junior ISA and plump for a collective investment such as a unit trust in your name but with the child noted as a beneficiary. You will not get quite the same tax efficiency but you will have total control.
And so you can ask yourself “what is best for my child”? A tax efficient £5,000 to squander in the Balearics aged 18 or a slightly less tax efficient £4,800 that I can control and give to them when they will really benefit from it?
Either way, if you do give your child a financial head start in young adulthood, they will thank you for life.
Invest Southwest are holistic financial planners from Whole of Market incorporating a Will Management business, as Regional Chair of the Society of Will Writers. The business was established in 2006 and is enjoying rare success, bucking the advisory trend with a wide spectrum of advice offered including, for example, mortgages. Managing Director David Penny has headed up Money May, a weekly slot on BBC Radio Somerset as well as regular ad hoc appearances. Comment published in 2011 in the Daily Express, Independent On Sunday, FT and many others. He delivers seminars on behalf of the FSA (CFEB) into large employers as a part of their Making the Most of Your Money campaign, to educate workforces. Authorised and regulated by: Financial Services Authority.
Invest Southwest, 49/50 East Street, Taunton TA1 3NA
Tel: 01823 353970 Fax: 01823 339726
Mob: 07813 835181
www.investsouthwest.co.uk
