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Recently, my two-year-old and six-year-old have increased my ‘working-mother guilt’ levels by asking me most mornings why I have to go to the office. My response is generally something along the lines of “to pay for your new football boots/dolls/pink swim hat¹”.
At the moment, these are relatively low-ticket items, but I’m increasingly aware that as they grow, so will the demands on my cash. While future mobile phone bills are slightly frightening, university fees and house deposits are a whole other ball game.
As we learned this week, according to research conducted by Legal & General and the CEBR, the Bank of Mum and Dad, if it were real, would be the UK’s ninth largest lender, on a par with the Yorkshire Building Society. Parents, grandparents and family friends² are expected to lend more than £6.5 billion pounds this year, helping to pay deposits on almost 300,000 mortgages.
While my parents’ generation were the happy recipients of defined benefit pensions and my own generation received free university education (or near enough), my children and their friends won’t be so lucky. And with property prices rising way ahead of wages, buying a home of their own is looking harder and harder.
But, as I find myself repeatedly saying, money doesn’t grow on trees. The Bank of Mum and Dad has finite resources. So how can we provide for both our own futures and those of our children?
The good news is that if you start saving early for young children, even small regular contributions can grow into significant pots of money – with the help of compounding, the eighth wonder of the world. By saving £75 a month for 21 years, assuming annual returns of 4%, you could accumulate a pot of money worth more than £29,500 – which should more than cover three years of tuition costs or equate to a 15% deposit on the price of an ‘average’ £200,000 house. You can, of course, save this money through a Junior ISA and avoid having to pay any income or capital gains tax.
For those readers who have yet to put a step on the property ladder themselves and are under the age of 40, there is now a product that can help: the Lifetime ISA. It is a tax wrapper that can be used to buy a first house and/or for your retirement savings and the great thing about it is that the government will give you a £1 top-up for every £4 you save up to a maximum of £4,000 a year until you are 60. That’s a 25% return on your money and not something to be sniffed at.
The downside is that you can’t touch the money (without incurring a hefty penalty) until you buy the house, but for anyone serious about purchasing property that shouldn’t be an issue.
When it comes to deciding where to invest the money, there are a number of considerations and your eventual choice will be very personal to you. But if you would like some ideas, these are the funds the FundCalibre team have picked for their children’s investments:
I generally take a little more risk with my children’s Junior ISAs than I do my own ISA, as they have a longer time horizon! In the last tax year I split their allowance between BlackRock Gold & General and Goldman Sachs India Equity Portfolio.
I invest in AXA Framlington Global Technology. It’s an exciting area of investment, and one that teenagers take an interest in, so it’s easier for me to engage the boys when we discuss how they may use their savings in the future.
We make regular monthly savings into Rathbone Global Opportunities and Stewart Investors Asia Pacific Leaders for my children’s Junior ISAs. By ‘we’ I mean both myself and my own Bank of Mum and Dad – the grandparents!
¹Delete as appropriate
²Note to self: must find some richer, generous friends as I’m sure mine won’t be forking out for a house for my kids…