New parents want to give their children the best possible start in life. Financially, this often means putting some money aside for when they are adults. Studies show the earlier you begin the better, but deciding where to put this money can be a daunting challenge.
There are myriad potential problems between now and when a child turns 18 and having flexibility might be key. Or the main factor could be to make the most money possible.
A friend of mine asked me this week how to start saving for her son. So I have come up with a series of questions that I think might help her – and other new parents too.
I have selected options that are all tax-free, so that parents do not have to worry about any gains being taken by the taxman.
The first is: Can you lock the money away until they are an adult? If the answer is yes, then a stocks and shares junior ISA might be the best option. It allows parents and other family members to add up to £9,000 per year which can be invested in stocks – the best-returning asset class over the long term.
You don’t have to know a lot about investing. Simply buy a cheap global stock market tracker to get you started. But this is far from a one-size-fits-all solution.
For example, the prospect of giving your child a pile of money at 18 may worry some. After all, human beings are different and there is no guarantee they will be responsible enough to handle that amount of money that young.
In this case, a stocks and shares ISA would work, where you can invest on their behalf and give them the money when you deem they are ready. Here the allowance is £20,000 a year but parents need to remember that this will be in their own name and therefore they cannot invest more than the allowance in other ISAs they have for themselves.
Then there are those that might need the money before the child turns 18. We can’t see into the future and there are many reasons why parents may need to take back some of the savings early.
If this is the case, a cash ISA may suit, as it allows parents to put money into accounts that make a set return in each year. At present, short-term bonds (one-year fixed options) are paying more than long-term ones.
This will require management, however, as each year you will need to check the money is making the best return. There are apps such as Raisin, which brings together different providers and allows people to switch into different, higher-paying accounts relatively easily.
This does, again, require locking the money away, but for much shorter periods. It also means parents will need to be more active with the savings, ensuring they know when the fixed term ends and being prepared to move to better accounts when their interest rate falls.
If complete flexibility is required, Premium Bonds might be a good solution. You can have £50,000 held in your name, but you can also gift children under the age of 16 bonds as well – just be aware that they will take over the ownership at 16, even earlier than the stocks and shares junior ISA.
The implied interest rate on Premium Bonds are 4.4%, according to the National Savings & Investments (NS&I) website, although this is not guaranteed. Instead, savers are put into a lottery and win prizes each month, with the top prize a whopping £1m. This can be used to buy more bonds, or put into an account of those mentioned above.
There are plenty of options for parents to choose from – the important part is to take the first step. Above is far from an exhaustive list of options, but I believe is a good way to get started.