Noble ambitions are selfless. Setting aside money for a child’s future is an everyday sacrifice that countless loved ones make.
In the 2017-18 tax year, parents and grandparents locked away a total of £902 million for the country’s children through Junior ISAs, or Individual Savings Accounts (ISA). This money can only be accessed when they reach 18.
Yet, like any noble ambition, attempts to build up a nest egg for a child’s adulthood can be undermined by circumstances and choices.
Saving money in cash may seem the safer option – up to £85,000 is safe in a bank or building society as it is covered by the Financial Services Compensation scheme – but over time rising prices can erode what it’s worth. This risk is acute when interest rates remain near historic lows, and in many cases, below the rate of inflation.
To give a child’s savings greater potential for growth, you might consider whether investments could play a role in realising your ambitions – and ultimately theirs.
Learning to embrace risk
If you are putting your savings to work for a child through investments, there is a simple rule of thumb that could make all the difference over the long term. That is, the younger the child, the greater their tolerance for investment risk can be.
It might feel especially counter-intuitive to put an infant’s first savings into higher risk investments. It certainly sounds a little uncomfortable. Yet there is a compelling logic to suggest they might eventually thank you for it.
Since the capital is being locked away until they reach adulthood, you can commit to investment approaches that target growth. Rather than worrying about day-to-day fluctuations in market values, you can focus squarely on pursuing long-term capital growth – maximising the potential value of their investments when they come to need them.
… but keep a lid on it
Embracing risk in pursuit of higher returns does not mean throwing caution to the wind, however. The more investment risk you take, the more your investment has the potential to grow, but the greater the chance of failure – and of permanent losses.
By investing across a portfolio of different assets, rather than relying on just a handful of investments to succeed, you can mitigate risk. In a well-diversified portfolio, any losses from individual assets should be offset by the performance of others.
While you might build your own basket of assets on behalf of a child, you could find it easier to achieve effective diversification by investing with a professional fund manager. Funds, which combine a range of assets into a single investment, will pursue a specific objective, such as delivering long-term capital growth, by selecting and managing a combination of assets.
The value and income from the fund's assets will go down as well as up. This will cause the value of your investment to fall as well as rise and you may get back less than you originally invested.
Making the most of ISAs
It’s not just cash that you can save into a Junior ISA, but investments too. Like an adult ISA, you can protect any capital gains that your investments might make for them from personal tax. Ultimately, this means your gift will have the maximum impact whenever they choose to liquidate their investments and take their money out.
Under current rules, you can invest up to £4,368 a year through a Junior ISA. However, Junior ISA tax rules may change in the future and tax advantages depend on individual circumstances.
Significantly, Junior ISAs can only be tapped when a child reaches 18. With the money locked up, for up to 18 years if you are making the first investment for a baby’s future, you can afford to take a genuinely long-term approach to investing.
In so doing, you could create opportunities for investment returns that could be transformative in their adulthood.
The views expressed in this document should not be taken as a recommendation, advice or forecast. If you’re at all unsure about the suitability of any investment, please speak to a financial adviser.