Saving and investing for children: future events
When it comes to saving on a child’s behalf, there may be a defined goal in mind. The most popular ones are funding school or university fees, or helping your children save up a deposit for their first home.
As with all savings goals, the earlier you start, the better, because you will probably pay more money in, and get the maximum benefit from compounded returns.
It’s important to choose the most appropriate ‘tax wrapper’ for holding savings or investments. This could mean:
- Either a junior cash ISA or normal deposit account in the case of cash savings
- Either a junior stocks and shares ISA or funds/shares held in a bare trust for other investments
You can find out more about these options in our guide to Investing on behalf of children .
Aside from tax, the other main factors that may affect your choice is how much risk you are prepared to accept, and how long until the money will be accessed (or the child reaches age 18).
How far away is the event you’re planning for?
· Very short-term goals. Match short-term goals with short-term savings plans. Consider an instant access savings account, as junior ISAs are not accessible until age 18. If you have a lump sum to set aside, you could also consider a fixed-term deposit for periods from 6 months to a year, which might earn you a slightly better rate of interest.
With interest rates so low, it won’t make a huge difference whether you go for instant access or term deposit rates.
· Short to medium-term goals. If the money is needed at any point in the next 5 years, then cash is still likely to be the best bet. If you select a cash deposit rather than a junior ISA, you will also have the choice of fixed-term deposits or instant access accounts. Fixed-term deposits lock cash savings away for a defined period, but usually pay a higher rate of interest than an instant access account. However, if you try to access the money early from a fixed-term deposit, an interest penalty will usually be payable, which may make that choice look like poor value with the benefit of hindsight. If you’re unsure when the money will be accessed, choose an instant access account.
If you choose a junior ISA, remember that the money can’t be accessed until the child is aged 18, and then only by the child.
· Medium-term goals. If you’re saving to pay for something 5 to 10 years into the future, you could consider a wider spread of investments from cash (instant access and fixed term deposits), to bond funds, to shares that have a bias towards producing income (dividends). Funds that invest in income-producing shares are generally less volatile, which means that you are less likely to suffer a big fall in value as the date you need your money approaches. However, returns from investments like shares (commonly referred to as ‘equities’) and bonds are not guaranteed, and you can end up getting less back than you invested.
Another new investment approach is ‘multi strategy’ investing. Instead of investing in one particular type of asset or a defined mix of different assets, the investment manager constantly reviews economic conditions, from which they generate new ideas for investments. A wider investment team then evaluates these ideas before making specific investments. This type of fund aims to produce returns in both rising and falling markets, but with lower volatility than investing in equity funds.
· Longer-term goals. For goals that are 10 years or more away, shares (equities) have historically tended to produce the best return over longer periods. However, the past is not a guide to future performance and the return from shares isn’t guaranteed – the value can be volatile. So, even over longer periods, you may want to think about diversifying your investments and keeping some of your savings in bond funds and little in cash.
Alternatively, as with medium-term investments, you could consider ‘multi-strategy’ type funds.
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