With Christmas fast approaching it’s not always easy to decide on gifts to buy loved ones. For children in your family the festive season is not complete without presents in a stocking or under the tree, but there is also a lasting gift that could give them a great start in life: an investment.
Investing towards life’s milestones
Education, a first car, getting married and the need to accumulate a deposit for a house are some of the costs faced by the younger generation. Investing from an early age could be a great way to give your child or grandchild a head start. Junior ISAs are a popular option as family and friends can help build up tax-efficient investments for a child with the same tax benefits as an adult ISA. There is no capital gains tax and no further tax to pay on income. Withdrawals are possible from age 18.
Investing for children: first steps
The first decision to make is what you are saving for, and the likely timeframe. This will, to some extent, dictate the type of investment you choose. Investments for children generally have time on their side, so taking on the risk and volatility of the stock market in pursuit of higher returns is worth considering.
Leaving money in cash is the lowest risk approach. It provides little return, but it does have the important advantage of keeping capital secure. However, cash is unlikely to grow fast enough to keep up with inflation (the increase in the cost of living), especially over long periods.
The main other types of assets – equities, bonds, property and so – each have different characteristics, but unlike cash, all can fall as well as rise in value to a greater or lesser extent. History shows that over the long term equities (representing shares in individual companies) are the most volatile asset class but have also provided the best returns.
Christmas Past: Stocks and shares versus cash
The table below shows how much £9,000 – the current annual Junior ISA allowance – would be worth if it was invested in a variety of different index tracking equity funds featured on our Preferred List over the past ten years. The percentage performance by year for each fund for the past five years is also shown.
Past performance is not a reliable indicator of future returns. Figures are shown on a total return basis, bid to bid price with net income reinvested; Source: FE Analytics, 10-year data: 30/11/2011 to 30/11/2021. Please note that the Junior ISA limit was much lower than £9,000 ten years ago, so this table is purely for illustrative purposes.
In comparison to the major stock market areas, a cash account or cash ISA would have typically provided a much smaller return and struggled to keep up with inflation – above illustrated by the UK Consumer Prices Index. However, past performance is not a guide to the future and with cash capital would not have been at risk. Investing should only be considered for long term goals because the value of investments can fall as well as rise, especially over shorter periods.
Christmas Present: The earlier the better
Starting immediately could make a huge difference to the savings your child can accumulate in a Junior ISA, and regular small amounts can add up over time. If parents put away just £100 a month from birth this could result in a sum of £34,673 at age 18 (assuming growth of 5% a year after charges).
Waiting until the child is ten and investing a monthly amount of £300 would result in a sum of £35,308 at age 18 assuming the same level of growth. The amount spent on contributions is higher in this instance (£28,800 compared with £21,600), but the end sum is similar. That’s because of the missed years of compound growth when starting later – showing how it can really pay to invest little and often. However, there are no guarantees and investments in Junior ISA accounts can rise and fall, so a child could get back less than invested.
Christmas Future: An ISA millionaire?
Whatever your goals, it can be amazing how regular investing and compound returns can work their magic over long periods of time. The £9,000 annual Junior ISA allowance allows ample scope to build a decent education fund or a house deposit. £9,000 invested each year for 18 years with returns of 7% annually builds a pot worth £336,411. A more achievable 5% return generates £274,851 for when a child reaches adulthood.
Junior ISAs automatically convert to adult ISAs at age 18, so it’s possible to continue the investing habit with the same account. With lots of commitments in early adulthood it might not be possible to add to investments that much, but continuing at the rate of £9,000 a year – or £750 a month – can lead to some outstanding results over time and could even make your child a millionaire. £9,000 invested each year growing at 5% will take 38 years to get to £1m. With a 7% return it takes 32 years, and at a (less realistic) 9% it takes 27 years.
The Charles Stanley Direct Investment Service Stocks & Shares Junior ISA
A parent or legal guardian of an eligible child can open a Charles Stanley Direct Investment Service Junior ISA online, manage the account and make the investment decisions. Grandparents, relatives or family friends can then also contribute at any time up to the annual investment limit. Please note we only provide Junior Stocks & Shares ISAs and not Cash ISAs.
Junior ISAs are easy to manage and flexible. With the Charles Stanley Direct Investment Service Junior ISA, you can contribute ad-hoc lump sums or a monthly amount via direct debit of at least £50. There is also a wide investment choice, including thousands of funds, investment trusts, exchange-traded funds (ETFs) and shares.
- No set-up costs and competitive charges
- Easy to manage
- Flexible – contribute lump sums whenever you want or a monthly amount of £50 or more
- Wide investment choice
- Award-winning customer service
- Transfer in existing Junior ISAs or Child Trust Funds
- Preferred Fund List for a starting point for your own research or Charles Stanley managed funds
- Socially responsible options
Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.