Up to this point in the Grow It campaign you’ve learnt about growing your own wealth. But in the final two episodes I want to shift the focus away from growing your own wealth and discuss the difference you can make to future generations by investing even a small amount each month.
In this episode I am going to focus on investing for children and the concept of intergenerational wealth. The reason why the topic of investing for children is at the end of the series is because you can only plan for their future if you have already planned for your own. It is the financial planning equivalent of putting on your own oxygen mask first during a plane emergency before turning to help children, as we’ve been instructed in every pre-flight safety briefing.
Investing for children & intergenerational wealth
First of all I am going to start with the ‘why’ you might want to invest for your children before moving onto the ‘how' - just as I did earlier in the series when teaching you about growing your own wealth.
So why might you want to invest for your children? The reality is that most of the reasons why you might want to start investing for your children’s future are the same as why you should invest for your own. But by investing early for your children, you can give them a head start in achieving financial independence and security when they are adults. Investing early for your children gives them the benefit of time and their investment returns can benefit from the power of compounding, resulting in exponential growth over time. As their investments have more time to grow and ride the market ups and downs it can lead to significant returns over the long term.
Investing for children can also be a way to build a legacy. By investing in assets that can appreciate over time, you can pass down wealth to future generations. This can provide financial security for your children and their children, and create a lasting impact on your family's financial future. This is where intergenerational wealth comes in. Intergenerational wealth refers to the transfer of wealth from one generation to the next within a family, often in the form of assets. Intergenerational wealth is a powerful tool for providing a financial safety net for family members, help fund education and career opportunities, and support the growth of businesses and other ventures. If you want to understand how powerful a tool intergenerational wealth can be, just look at the most powerful and influential people in the world today. Many of them, including world leaders, are only in positions of power thanks to wealth they’ve inherited. By contrast, other sections of the population who do not benefit from intergenerational wealth are often underrepresented. As such intergenerational wealth can have both positive and negative impacts on families and society but It can be used to help break the cycle of poverty and provide funds for education, entrepreneurship and other opportunities.
The most popular podcast we ever produced is called, How to become a millionaire. The feedback we had was amazing, especially when some wrote in to say it would be life changing for their children. In that episode I highlighted how by being disciplined and committed to regularly investing small amounts of money over the long term could set your child on a path to become a millionaire by the time they reach retirement age. For example, by starting out investing as little as £25 a month for a five year old today they could be a millionaire by the time they retire. And by millionaire I mean a millionaire in today’s money, which would mean that they’d have over £3m invested by retirement to take into account the ravishing effects of inflation. If you are interested to hear more about the concept then listen to the millionaire episode via the link above.
But investing for children doesn’t have to be just about making them financially secure. You could instead be interested in investing to fund future education costs, perhaps university fees, or home purchases. Whatever the reason, by investing early and taking advantage of compounding, you can help your children achieve long-term financial security, protect against inflation and create a lasting legacy.
So how do you invest for your children or grandchildren? Before we get on to investing there is of course the option of putting money into a children's savings account. Many of the banks and building societies offer savings accounts specifically for children, providing a preferential interest rate for the first 12 months or paid on balances up to a certain limit. Accounts will have to be opened by somebody with parental responsibility if the child is below a certain age, which differs between providers. Opening this type of savings account is simple and the funds can be accessed at any time. Children over seven can usually manage their savings account themselves and even can take money out and pay it in - depending on the account.
While you can get some attractive interest rates, it’s unlikely that they will exceed the rate of inflation over the long term and so the real value of the money in the accounts will be eroded over time. Not only that, many of the top interest rate accounts will limit the amount you can pay into the account each month. Make sure you check out our weekly updated best-buy tables of children's accounts.
So that leads us nicely on to Junior ISAs. A JISA is a long-term tax-free savings account for children and contributions can be made up to an annual limit of £9,000 currently. Think of it as an ISA but for children. Parents or guardians with parental responsibility can open a JISA and manage the account but the money belongs to the child. Anybody can contribute to a JISA which means it is perfect for family and friends to gift money over time. The child can take control of the account when they reach the age of 16, but cannot withdraw the money until they reach the age of 18.
There are two different types of Junior ISA (JISA) - a Cash Junior ISA that acts like an ordinary savings account but where all returns are totally tax-free. Then there is a Stocks and shares Junior ISA where you can invest in stocks and shares, bonds or a host of assets via funds . All capital growth and any dividends received will be totally tax-free. So pretty much everything you’ve learnt up until now that you can do to grow your own wealth via a stocks and shares ISA you can do for your child via a Junior ISA.
So that means it's possible to pick a ready-made Junior ISA portfolio from someone like Wealthify who will manage the investments for you or you could use an investment platform such as Fidelity International to build your own portfolio of funds, just as I explained in episode 6 of this Grow it Series. One recent positive development in this space has been that some platforms like Fidelity International no longer charge a platform fee for administering your child’s Junior ISA. So you simply pay the costs of the underlying investments you choose. For more information on the best junior cash ISA rates as well as the stocks and shares JISAs options out there then read our article 'Best Junior stocks and shares ISAs'.
Obviously JISAs have the tax-free benefits of a normal ISA, as well as contribution limits, but for some people one drawback is that the child does gain access to the funds at age 18, and they do not require your consent. So it is something worth bearing in mind if control is important to you. If it is then there is nothing to stop you instead, investing in your own name (perhaps via your own ISA allowance) and gifting the money to them when they reach adulthood, if you still wish to at that point. But technically, depending on the size of the gift there could be IHT implications in doing so.
Moving on I will briefly mention Child Trust Funds. While Child Trust Funds (CTF) are no longer available, you can still contribute up to £9,000 a year into an existing CTF account. The money belongs to the child and they can only take it out when they have reached the age of 18 but can take control of the account when they’re 16. There is no tax to pay on any CTF income or any profit it makes. Essentially they were the precursor to JISAs, but with a government incentive when initially opened.
It is possible to lock any money you invest away for longer than just up until the child turns 18, if you so wish. You can do this by opening a Junior Self Invested Personal Pension (SIPP) for your child which is a type of pension designed specifically for children. While on the face of it starting a pension for a child may appear a bit premature, the long investment period and the fact they can’t access the pension fund until age 55 could make it an attractive long-term investment option. Up until the age of 18 a Junior SIPP is managed by a parent or legal guardian, who will make the investment decisions. Investment of up to £2,880 per year can be paid into a Junior SIPP, with tax relief of 20% added to any investment. Just like an adult pension you can choose to invest the money within the Junior SIPP in a similar way. Unfortunately there aren’t many JSIPPs out there but in our article "Best and Cheapest Junior SIPPs" - which I link to in the notes of this episode - you can find out more information.
Finally I will mention NS&I Premium Bonds for children as another option. Putting money in premium bonds is neither investing nor is it the same as putting money in a savings account. Buying Premium Bonds as gifts for children has long been popular with parents and other family members. Holders of Premium Bonds are entered into a monthly prize draw, giving them the opportunity to win between £25 to £1 million, tax-free. Unlike other savings accounts, Premium Bonds do not pay interest, which means their value will gradually decrease as inflation reduces spending power unless, of course, you win some prizes. Although Premium Bonds can be a good idea for small gifts of £25 or more, they are not viable long term if you are looking to build a worthwhile lump sum.
Anyone can buy Premium Bonds on behalf of a child, but must nominate a parent or guardian to look after the bonds until the child reaches the age of 16 and must also nominate to have any prize money reinvested in more Premium Bonds. The current prize pot means that premium bonds pay a notional interest rate of 4.4%.
So there are plenty of options for starting to invest for your children, and even for family members to contribute. The important thing to takeaway is that you can invest small amounts cost-effectively. But consistently contributing over the long term, which allows you to take on more investment risk, can produce life changing results.
Useful links
- How to become a millionaire podcast
- Best buy table (Children's savings)
- Best Junior Stocks and Shares ISAs
- Best Junior Stocks and Shares ISA video
- Best and Cheapest Junior SIPPs
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