Investing for your children can be a smart move. Whether you want to help them with a house deposit, start a pension for them, or simply give them a financial head start in life, investing while they’re young can really make a difference. Of course, determining the best way to invest for your children can be challenging. With that in mind, here are five tips.
Take advantage of the tax-efficient accounts available
One of the first things you should do if you’re planning to invest for your children is take a look at the tax-efficient investment accounts available. These could potentially help you build up far more wealth for your children over the long run.
In the UK, the two main tax-efficient accounts for children are the Junior ISA (there’s a Junior Cash ISA and a Junior Stocks and Shares ISA) and the Junior SIPP. The former has an annual allowance of £9,000 while the latter has an annual allowance of £2,880 (£3,600 after tax relief).
Both of these accounts allow you to invest tax-free. Bear in mind, however, that there are withdrawal restrictions. Money in a Junior ISA cannot be accessed until the child is 18. Meanwhile, money in a Junior SIPP cannot be accessed until 55 (57 from 2028).
Embrace long-term time frames
When investing for your children, you often have a long-term investment horizon (they may not need the money for many years). This can be a real benefit. With time on your side, you have the ability to take advantage of the power of compounding (earning a return on past returns). Over the long run, even small amounts of money can turn into large sums when returns are compounded.
With a long-term horizon, you also have the ability to invest in riskier asset classes such as shares. Shares can be volatile in the short term. However, history shows that over the long run, they tend to generate much higher returns than cash savings do. For example, over the last 10 years, the MSCI World Index (a global stock market index) has risen about 11% per year (in US dollar terms).
That’s significantly higher than the returns that cash savings accounts have delivered. For a large part of that period, cash savings accounts were only paying around 1% interest per year.
Diversify to reduce risk
It’s worth pointing out that there are ways to reduce the risks of investing in the stock market. One straightforward strategy is to diversify. This involves spreading your capital out over many different stocks, industries, and geographies.
There are a few different ways to do this. One is to buy a range of different stocks. Another way is to invest in funds as opposed to individual stocks. With a fund, you can get access to hundreds, or even thousands, of stocks with one investment.
An example of a fund is the Vanguard FTSE Global All Cap Index, which is available on platforms like Hargreaves Lansdown and AJ Bell. This is a simple, low-cost global equity fund that provides broad exposure to the stock market.
Another example is the iShares Nasdaq 100 UCITS ETF, which is a technology-focused exchange-traded fund (ETF). This could be a good option to consider for a Junior ISA or Junior SIPP as the world is only going to become more digital in the years and decades ahead.
Average-in over time
Investing small amounts regularly is another simple but effective risk management strategy. By doing this, you can minimise the risk of investing at the top of the market and then seeing the value of your children’s investments fall significantly when there is a pullback.
Keep fees low
Finally, it’s smart to keep fees low. Over long timeframes, fees can eat away at your capital. One way to keep fees low is to invest in index funds (like the two mentioned above). These typically have very low ongoing fees. Another way is to select an investment platform that has low fees.
You can find more information on platform fees when investing for your children right here at Good Money Guide.
| JISA Provider | JISA Fees | FX | Good For | Customer Reviews | More Info |
|---|---|---|---|---|---|
 | 0% | 1% - 0.25% | All-Rounder | (Based on 1,094 reviews)
| See JISA Capital at Risk |
 | £0 | 0.02% | Market Access | (Based on 1,119 reviews)
| See JISA Capital at Risk |
 | 0.25%- 0% | 0.75% - 0.5% | Low Costs | (Based on 934 reviews)
| See JISA Capital at Risk |
 | 0.6% | n/a | Portfolios | (Based on 2,564 reviews)
| See JISA Capital at Risk |
 | 0.75%- 0% | 0.7% | Plans & DIY | (Based on 235 reviews)
| See JISA Capital at Risk |
 | 0.5% | n/a | Simplicity | (Based on 631 reviews)
| See JISA Capital at Risk |
 | 0.5% | n/a | Interaction | (Based on 3 reviews)
| See JISA Capital at Risk |
 | 0.3% | 1% - 0.15% | Service | (Based on 125 reviews)
| See JISA Capital at Risk |
Based in London, Edward is a distinguished investment writer with an extensive client portfolio comprising a diverse array of prominent financial services firms across the globe. With over 15 years of hands-on experience in private wealth management and institutional asset management, both in the UK and Australia, he possesses a profound understanding of the finance industry.
Before establishing himself as a writer, Edward earned a Commerce degree from the prestigious University of Melbourne. Complementing his academic background, he holds the esteemed Investment Management Certificate (IMC) and is a proud holder of the Chartered Financial Analyst (CFA) qualification.
Widely recognized as a sought-after investment expert, Edward’s insightful perspectives and analyses have been featured on sites such as BlackRock, Credit Suisse, WisdomTree, Motley Fool, eToro, and CMC Markets, among others.
You can contact Ed at edward@goodmoneyguide.com
