Starting out Time’s on her side

Saving for children

Time is a powerful ally of the investor – so where you are investing on behalf of children, you start with a great advantage. Not only do long time-scales allow for greater risk-taking and thus higher potential returns, but there is the power of compounding as profits are reinvested year on year.

Assuming an annual return of 5pc after fees, £10,000 invested at birth would grow into £43,000 by the child’s 30th birthday. It’s the head start most 30-year-olds would dream of.

If that same £10,000 was invested at their 18th birthday, the pot would be worth less than £18,000 by the time they turned 30, assuming the same annual return.

At today’s best fixed cash saving rate of 2.2pc, if the £10,000 was invested at birth, by 30 the pot would sit at just over £19,000.

Choosing the right vehicle

As with adult Isas, junior stocks and shares Isas (or “Jisas”) offer a tax-free wrapper within which investments can be held tax-free.

The pay-in limit is £4,080 a year. A junior Isa can be opened and managed by a parent or guardian, with others only able to contribute.

The account can be managed by the child when they turn 16, with funds locked away until they are 18.

Many of the main fund platforms offer junior stocks and shares Isas. These tend to levy an annual fee, and as with any other investment fund, management fees or share dealing fees will be due too.

Ditch the child trust funds

Child trust funds were introduced in 2005, and were given to children born between September 1, 2002 and January 2 2011. An initial £250 voucher was given to parents if they opened an account, and if they didn’t an account was automatically created for them.

Hundreds of millions of pounds sits unclaimed in forgotten accounts.

The scheme has since been replaced by junior Isas, and existing child trust funds can now be converted, as both cannot be held simultaneously.

Both are tax-free accounts with the same annual allowance, but the investment options available with child trust funds are very limited and it’s often cheaper to invest through a junior Isa.

Junior Sipp

Contrary to popular belief, children can have a pension, and junior Sipps (self-invested personal pensions) are available once a child is born. Up to £3,600 a year can be saved, with the Government automatically topping up payments with the equivalent of 20pc tax relief, so total contributions only need to be £2,880 to hit themaximum.

Now stir in the magic elixir of time and compounding.

Tom Stevenson, investment director for personal investing at fund shop Fidelity, said: “Our calculations show that if you were to invest £300 a month into a Sipp for the first 18 years of their life (even if they added nothing themselves during their adult life) they would have a very impressive £603,441 pension pot at the age of 65.”

Of course, this money is not accessible until the beneficiary turns 55. And pension rules may have changed hugely by then, perhaps curtailing the advantages.

Bare trusts

A bare trust is the simplest form of trust, where the trustee makes a gift which is held for a specified beneficiary. They are often used by grandparents or other family members who can open and manage one directly, unlike a junior Isa.

The beneficiary becomes entitled to the money at 18, but up until that point the trustee can manage the investments held within it, including withdrawing money – as long as it is to the benefit of the beneficiary, such as to pay school fees.

There are no contribution limits, making them particularly useful for passing on money early to limit inheritance tax.

But 18 is, for many, still a young age at which to take on the responsibility of owning investments or cash. With junior Isas, child trust funds and bare trusts, once the child turns 18 the money is theirs to do with as they please.

Invest through your own Isa

If the idea of your child having full control at 18 is concerning, you can always invest for them within your own Isa. The annual adult contribution limit is far more generous at £15,240, moving up to £20,000 next year.

There are problems to consider, however. Grandparents or other family members may be unwilling to contribute as the parent or guardian is fully in control of the money, with no obligation to use it for the child.

It is not possible to give the money to the child within an Isa wrapper.

Tax implications

Junior Isas, child trust funds and child pensions all enjoy similar tax protection.

There is a tax quirk to watch out for with some savings plans, however. If a child earns more than £100 in a year on money gifted by a parent, that income will fall under the parent’s tax regime.

This doesn’t apply to junior Isas, child trust funds and junior Sipps, but would apply to a bare trust or other kinds of child savings plan.

This limit does not apply to money given by anyone else. In this situation, the money is taxed under the child’s own tax regime. Children are liable for tax, but also have the full £11,000 income allowance and £11,100 capital gains tax allowance.

In real life, it can be complex

Emanuel Andjelic runs a technology start-up and lives in east London with his wife, Zejna, and two-year-old daughter Anja, on whose behalf he has been investing since her birth. The savings go into the couple’s own Isas, and they use online investment service Nutmeg.

They chose to invest under their own names as “with some of these longer-term solutions that tie up money until she’s a certain age, it’s tricky as I don’t know if I might need

Investing for children involves the magic elixir of time and compounding

that money sooner for her.

“Locking away the money for 18 years was a no-go for me, and while I like to think I’ll bring up a child who I’ll give money to and let her be responsible for, I don’t know what 18 years holds.”

Nutmeg is a service that automatically builds and manages a portfolio based on the investor’s attitude to risk and goals they set out. Managing both his own and his wife’s Isa, Mr Andjelic has chosen options at the top end of Nutmeg’s risk scale.

“Regarding university, we think that 16 years is a long enough time-scale. I’m thinking I’ll be able to pay for dayto-day stuff – although not private schools – out of my salary.”

For ideas on what investments to buy for your child or grandchild, find this article on telegraph.co.uk/money

Building it up: Emanuel Andjelic with Anja, his two-year old daughter