How to in­vest for the very young

The Daily Telegraph - Your Money - - YOUR MONEY -

Shares, prop­erty or – heaven for­bid – even Bit­coin? Amelia Mur­ray helps one cou­ple find some prac­ti­cal and de­tailed ad­vice

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.

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.

‘They would be bor­row­ing to in­vest, which I’d strongly ad­vise against’

Op­tions: Matthew and Lana White should set up a Ju­nior Isa for three-month-old Ma­teo, our ad­vis­ers sug­gested, but buy­ing a prop­erty abroad may be too risky

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