Piggy banking
Where to invest for your children’s future
Of all reader questions sent to The Daily Telegraph’s personal finance desk, this is among the most frequently asked: what investments should we make now on behalf of a child or grandchild, given that they won’t need the money for as long as 20 years?
Matthew and Lana White want to start a savings plan for their three-month-old son, Mateo.
The couple, both teachers, have a joint annual income of £70,000. Mrs White, 28, is currently on maternity leave but plans to go back to work part-time in July, so their income will drop by about £10,000 a year.
Between them they save £600 a month into their joint current account, which holds £2,000. Mr White, 29, also has £1,000 in a stocks and shares Isa and tops this up by £30 a week.
They live in west London in a flat worth £630,000. The £100,000 mortgage on the flat, bought three years ago, costs them £550 a month.
Mr White wants to set aside as much as he can for Mateo but is also interested in investing in property abroad. The couple are considering New Zealand, as Mr White has family there. He said the rental yield on a £250,000 flat in Auckland was around 6pc and that they might decide to relocate there one day. They would need to remortgage their flat to fund the purchase. Mrs White is originally from Croatia so the purchase of a holiday let there is also an option.
Nick Onslow, a chartered financial planner at Russell Ulyatt Financial Services, said:
The predicted costs of bringing up children are ever-increasing and it is important to get the basics right.
Mrs White should claim child benefit if she has not done so already, as the maximum backdating allowed is three months. The rate is £20.70 a week and it is tax-free. By claiming this allowance her National Insurance credits will be paid until her son is 12. This will count towards the 35 years of contributions needed for a full state pension.
Based on their overall objectives and Mrs White’s reducing salary, they should keep cutting their debts and mortgage and try not to do everything at once. I would prioritise saving for their son.
They should first decide what they are saving for: university, a house deposit or something else. Then they need to think about whether to invest in their own name or their son’s – any funds invested in their son’s name will automatically pass to him at age 18.
If they are happy with that they could save a maximum of £4,128 a year into a Junior Isa (Jisa). Friends and family could also contribute. Based on an investment horizon of 18 years they should consider investing in a global mix of shares as the returns on cash Isas are currently below inflation. All growth and withdrawals are tax-free.
If the Whites want to invest for even longer on Mateo’s behalf, they could save £2,880 a year in a selfinvested personal pension (Sipp). The Government will top this up by £720, but he won’t be able to touch the money until he is in his late 50s or possibly older, depending on whether legislation in the future is changed.
I’d suggest putting the money, whether in an Isa or a Sipp, in a global stock market fund called Vanguard Lifestrategy 100pc equity. You can do this via an investment “platform” such as Hargreaves Lansdown.
I can understand the motivation to own a property in New Zealand if the intention is to live there one day. But I don’t think they’re in a strong enough financial position to buy abroad. The predicted yield of 6pc on a £250,000 flat in Auckland would be £15,000 a year. There would also be income tax to be paid in New Zealand, maintenance costs and the cost of the purchase.
As they have only limited savings they would need to remortgage their current home by slightly more than the purchase price to cover the other costs.
Their current mortgage payments would rise by at least £1,000 a month and the potential profit would be only £3,000 a year at most. Risks include void periods and fluctuating exchange rates, which could mean that they lose money.
A holiday home in Croatia comes with similar risks and I’d wait to see what deal Britain negotiates with the EU before making any decisions.
‘They would be borrowing to invest, which I’d strongly advise against’
Neil Moles, managing director of Progeny Group, the wealth management service, said:
Investing small amounts over an 18-year investment time horizon means that the Whites are likely to be able to ride out fluctuations in the stock market, benefiting from two great features of long-term investing: the purchase of additional assets at times of stock market lows and the compounding of gains over time.
A low-cost fund that invests in a range of assets and geographical sectors, such as Black Rock Consensus 70, would be ideal. Investing £4,128 per year in a Jisa over 18 years would result in a lump sum of about £98,000, assuming annual returns of 4pc.
Junior Isas do not allow access until the child turns 18, when they can do what they like with the money. But from 16 Mateo can take control of the account, which will help him understand investment and risk, a valuable life lesson.
When he turns 18 the funds held in his Junior Isa can be transferred to a Lifetime Isa. Up to £4,000 can be paid in each year, which the Government tops up by 25pc. The money saved can then go towards Mateo’s first property purchase.
Alternatively the Jisa could be converted into a stocks and shares Isa to fund other things such as marriage or the purchase of a car.
When we look at Mr White’s interest in a buy-to-let property, he would be borrowing to invest, which only increases the risk involved and is something I’d strongly advise against.
But they should also consider pension contributions, as these benefit not only from tax-efficient growth but from upfront tax relief, boosting any initial contribution.