Last year I became a parent for the first time and after the initial months of figuring out how to be a dad, things started to settle a bit. One thing changed forever though, and that was my priorities. As I’m sure others in my position have felt, you start prioritising your child’s wellbeing over your own. It starts with their sleep over yours (that one lasts a long time) and very quickly you start thinking about their future.
When I thought about her future, one of the first things I started looking at was how best to save or invest for it. Despite being from a finance background it wasn’t the most straight forward experience (I’ve heard this over and over again from my friends who are parents too) and so I’ve decided to write this post to hopefully help some parents currently thinking about the same thing.
Before even beginning to look at potential products, I suggest you think about what specifically you’re saving for. Are you just interested in building up a general savings bucket that you can give your child when they turn 18? Are you saving up to send them to private school? Pay for their university? Help them with their first house deposit?
Once you’ve figured this out you can start thinking about how much you’ll need to save, how long you’ll need to save for and then find the best product to meet this goal. Here’s a summary of the most common products and when they might be useful.
Child savings accounts
This is usually the first thing that comes to parents’ minds when they start thinking about saving for their children — and it’s not a bad place to start. You tend to get better interest rates than adult savings accounts but there tends to be some restrictions such as the amount you can put in and how many times you can withdraw. On top of that, those high rates tend to only last 1 year so to make the most of it you’ve got to continuously move the money around. Finally, depending on the amount you’re looking to save and where the money is coming from (parent vs. grandparent) there’s also the big issue of paying tax whenever the interest income is more than £100 in a year.
Given all this, I tend to think that child savings accounts are best when you’re saving for something short term like nursery fees. I personally don’t think they work very well if you’re trying to build up a long term pot for your child. If you are interested in them, here’s a quick summary of some of the best ones around.
Hopefully from the above you can see that while these accounts may be good in the early years, if you’re a regular saver you’ll quickly exceed the maximums and it’ll be a full time job trying to optimise for the highest possible interest rate. But if you do have the time to optimise you can make an extra 10–20% by the time your child turns 18.
Another popular option with parents are junior ISAs. These are great if it’s the parents contributing as interest income earned is tax free (remember with regular savings accounts you need to pay tax on interest over £100), and you can put in up to £9,000 per year!!! But they do come with a big drawback. Any money you put in there can only be accessed by the child when they turn 18. If you’re trying to save up to help them through University or contribute towards their first house this is a great way to go, but if you want the optionality of withdrawing money early to maybe pay towards private education, Junior ISAs are not the way to go.
You can get two types of Junior ISAs, cash ISAs and stocks and shares ISAs. The best rate you can get for a Junior cash ISA at the moment is 3.25% with NS&I (they can change this at any time and it wouldn’t surprise me if this came down over the next few months given the current interest rate environment). Given the money is locked up till they’re 18 I’d personally take a bit more risk and open up a Junior stocks & shares ISA. If you're interested in this then just sign up to Nosso and we'll let you know when we're able to offer this
We've put together the below example to explain why we think stocks & shares are the way to go.
Option 1: Cash ISA at 3.25%
If you contribute £1,000 per year from the day they’re born and earn 3.25%, then you’ll have £24,750ish to give them on their 18th birthday.
Option 2: Stocks & shares ISA
With a stocks and shares ISA you have no idea how much return you’ll make per year (they’re more risky), but if you look at historic returns over a long period (say 18 years) the market tends to return on average 5% per year (obviously in any one year the market could go down so I would never recommend this for short term investments).
If you contribute £1,000 per year from the day they’re born and earn 5.00%, then you’ll have £29,500ish to give them on their 18th birthday. That’s an extra £5k which will go a long way towards their university fees.
What if you need the money for private school fees?
Good question, neither JISAs nor child savings accounts seem right for you. But private school fees can be a huge expense (around £11k per term if you’re thinking of boarding 😬) so it’s important to start saving up early on and to find a tax efficient way to do so.
One thing you could do is invest through your own ISA. While this is probably the easiest in terms of flexibility, it counts towards your own allowance and so depending on your personal situation may not be the smartest thing to do.
Another thing to do, which is a little more confusing, is to set up a Junior Investment Account within a bare trust. These are great as the money can be used any time providing it’s for the benefit of the child (e.g. education fees); gains or income use the child’s personal allowances (so they don’t count toward your tax thresholds); and there are no annual investment limits.
There is a catch though; to get the best out of them they need to be carefully looked after. Two points in particular need attention — (a) money gifted by grandparents must be managed in a different way to that gifted by parents, and (b) any tax liability arising from the way the money is invested must be managed. For these reasons they don’t tend to be very popular with the every day person.
Hopefully this post has helped you get a better understanding of your options — as you can see it’s not the most straight forward. For this reason we built Nosso. You’re already busy being a parent, the last thing you want to do is spend time trying to figure this out as well. We streamline all of this for you and make sure your child’s financial future is managed in the right way for you based on your goal.
All writers' opinions are their own and should not be read as personal financial advice. Individual investors should make their own decisions or seek independent advice. As with any investment, your capital is at risk and may be going up as well as down which means you may be left with less than your initial investment. Past performance is not a reliable indicator of future performance.