Investing for Children – As ‘Generation Y’ Fronts up to Tough Times

Those born between 1980 and 2000 are the first generation to reach adulthood in the new millennium and have been variously dubbed as Generation Y, Generation Selfie and iGen; they are generally portrayed as taking their financial future seriously despite facing considerable challenges.

Stephen Haysom considers some of the options that are available for those wishing to give their children a financial head start.

Average student debt now tops £40,000, wages among the young have been squeezed, rents are high and property ownership a pipe dream for most – with the average deposit required reaching 82% of salary many are turning to the Bank of Mum and Dad.
 
Faced with such exacting circumstances it is little wonder that despite the reams of research suggesting that earlier and longer is rarely the wrong strategy when it comes to retirement planning, it is difficult for the millennials to look so far ahead; as a result, a survey jointly sponsored by BNY Mellon has recently, rather bleakly, described them as ‘Generation Lost’.
 
The survey suggested that this group feel that they have received little financial education at school, university or from employers and financial companies have scant interest in them because they have so little to invest.
 
However, insurer Aviva points out that millennials will make up 75% of the workforce in the UK by 2025 and if they are not empowered and encouraged to provide for their own retirement the additional burden on the State could reach £60 billion every year as life expectancy continues to rise – a sum equivalent to spending on defence, higher education and policing.
 
With the average starting salary for a graduate in the UK at £28,000 any accusations of profligacy can be dismissed – the cost of everyday living now means that this is a generation with very little disposable income.
 
Auto enrolment now means that all of Gen-Y in employment will have at least some workplace pension provision and there are steps they can take to improve their circumstances.
 
Debt invariably attracts higher rates of interest than savings, so it makes sense to pay down as much debt as possible and ensure that any remaining is as cheap as possible.
 
Whilst indubitably difficult, buying a property rarely makes less sense than renting and the soon-to-be-launched Help to Buy ISA could help some on to the ladder.
 

‘it is now more important than ever that parents pull out all the stops to give their children a financial leg up’

 
However, rather than just being there to offer a bail out when the fruit of their loins hit the financial buffers, an increasing number of parents are actively seeking to provide a financial head start by planning for school and university tuition fees and helping them get on the property ladder.
 
A range of options exist for those saving for children, primarily based around how much control the parent wishes to have over the investment and at what age they would like the resulting cash to be made available.
 
It is generally accepted that one of the most important factors in the achievement of a successful outcome to an investment strategy is to start early and to continue investing for a long period of time and it is now more important than ever that parents pull out all the stops to give their children a financial leg up.
 
For the sake of comparison we consider options that exist without the requirement to set up relatively complex and often expensive trust arrangements where it is necessary to take professional advice.

Each option is explored here in more depth:

National Savings and Investments Children’s Bonds

 
NS&I Children’s Bonds are cash savings accounts for children that are exempt from Income Tax on interest earned and are very low risk as they are guaranteed by the Government.
 
These are available for any child in the UK and control passes to them on the occasion of their sixteenth birthday.
 
Starting at just £25, the maximum investment is £3,000 per child per issue in 2015/16 and interest is typically fixed for five years, with the ability to access the money at a loss of 90 days’ interest.
 
With interest rates at historically low levels the biggest threat to Children’s Bonds is inflation – the rate offered by the current, 35^th issue, is 2.5% p.a. which still currently makes sense but would risk being eroded in real terms if inflation nudged up.
 
Investment companies, banks and building societies offer children’s savings plans which use a child’s personal tax allowance, currently £10,500, as an amount they can earn a year before being taxed.
 

Designated (Named) Accounts

 
Most brokers will allow one or more Dealing or General Investment Accounts to be set up by a parent with a designation for a child – Dwayne Pipe a/c 1234 (Jose Pipe) – for example.
 
The account holder retains total control of the account, makes contributions and all investment decisions and decides when to pass the assets to the designated account holder.
 
However, this also means the account holder retains the tax liability – Income and Capital Gains – as well as potentially Inheritance Tax as the assets remain part of the account holder’s estate.
 
Such an arrangement may appeal on the basis that it is totally flexible, with assets available at any time should circumstances dictate and the notion of a segregated ‘pot’ with a potentially separate time horizon may allow the account holder to employ a slightly different investment strategy.
 

Junior ISA

 
Junior ISAs are investment accounts for children that protect money from Income and Capital Gains Tax in the same way as their grown up cousins the ISA and now the ‘New’ ISA (NISA).
 
Children born between September 2002 and January 2011 had a Child Trust Fund (CTF) opened for them by the Government with a £250 ‘gift’ to encourage the savings habit.
 
When CTFs were disbanded many found themselves trapped in accounts that the providers had lost interest in, paying dismal returns and attracting high fees. However, since April 2015 parents have been able to transfer these funds into a Junior ISA with its greater choice and flexibility.
 
A Junior ISA is opened by a parent or guardian, but grandparents, other family members and friends are then able to make contributions up to an annual limit, which in 2015/16 is £4,080.
 
The parent or individual responsible for the account controls contributions and investment decisions but the account is held in the name of the child and all assets are ring-fenced until the eighteenth birthday whereupon the account becomes a NISA operated in their name, affording them full and unfettered access.
 
Like a normal ISA, there is a cash and stocks and shares option for the Junior version, but remember, you are not investing for yourself but for your child, who will be the only one able to access the money when they reach the age of 18 except in cases of death or terminal illness.
 
Junior ISAs are a long term investment vehicle and it is very important that you select a provider that offers you the pricing structure and investment choice appropriate to your requirements.
 
In addition to a Junior ISA a diligent saver aged between 16 and 18 can invest up to £15,240 per annum into a Junior Cash ISA.
 

Child SIPP

 
Establishing a SIPP (Self Invested Personal Pension) for a child may allow you to help them throughout their working life.
 
This is a very long term investment which could be the ideal vehicle to benefit from the performance of stock-market investments.
 
The annual contribution limit to a Child SIPP is £2,880 which is topped up to £3,600 by the government in the form of tax relief.
 
By maintaining this level of contribution from birth to aged eighteen and achieving an investment growth rate of 5%, your child could have a pension pot worth more than £700,000 when they hit fifty five.
 
Compared to the average pension pot in the UK of £30,000, your child would effectively have their retirement taken care of before they go to university, but that money will not be accessible until they reach retirement age.
 
However austere it sounds to be part of ‘Generation Lost’ it can only be hoped that as a society we are empathetic with a very large number of people that will almost certainly be less well off than their parents and that the financial services industry will be creative in delivering solutions to those facing very real financial challenges.
 
Improved levels of financial literacy will help today’s parents to make things better for their offspring if they are able to establish a savings and investment regime on their behalf early.
 

‘even a modest regular savings and investment plan could do to help your children become part of ‘Generation Found’’

 
Parents and step-parents can gift their children as much money as they like, but there is a rule that the money can only earn up to £100 in interest a year tax-free. Money given by grandparents and other adults is not subject to this cap.
 
Investing for children is a long-term game, so you can afford to take more risks than you might do with your own money but you should still make sure that you create a balanced portfolio to ensure that your risk is spread across sectors and asset classes.
 
Unless you are a dedicated DIY investor then picking individual shares may not be the best move; a fund or investment trust will allow you to spread your risk and require less work.
 
Try to select a complementary range of investments, balancing growth investments – those in companies where you expect to see a rise in their share price over time and mainly deliver returns – with income investments – companies that that pay dividends which can be reinvested to deliver solid returns from compounding over time.
 
Charges are a key consideration – high management fees eat into returns and over 18 years this can deliver a sizeable drag on how much an investment makes for your child.
 
Passive tracker funds carry low management charges – the HSBC FTSE 250 Tracker, for example, which tracks the mid-share index has an Ongoing Charges Figure (OCF) of 0.17% and the Vanguard FTSE 100 UCITS ETF has an OCF of just 0.09% – whereas some contend that the improved returns from a good active fund manager more than justify the additional cost; choose wisely though because many active funds may charge handsomely yet still underperform passive index trackers.
 
Increasingly popular are investment trusts which offer a managed portfolio but with low fees.
 
With so many things to consider, it may just be too tempting to let April’s ISA deadline slip and ‘start next year’ – but then spare a thought for those facing student loans of £40,000 and struggling to get on the property ladder – and think what even a modest regular savings and investment plan could do to help your children become part of ‘Generation Found’.