Should I spend or should I save?
With our social lives on hold, holidays postponed, and many shops shut, there hasn’t been much to do...
The prospect of having a baby is sure-fire way to focus the minds of any couple. It is a life-changing event, bringing happiness, sleep deprivation and extra financial responsibilities all at the same time.
Prince William and Kate Middleton, the Duchess of Cambridge, announced they are expecting their third baby. While they are fortunate that they don’t have to worry about money, most other expecting couples should think about how they can build a nest egg for their baby.
Here are four ways to save towards your child’s financial future:
1) Open a children’s savings account at a bank or building society with as little as £1. Your child will receive a debit card (with no overdraft facility), which can be a good first step towards learning about saving and spending. Interest rates are very poor though, so your kids won’t learn about the eighth wonder of the world: compounding! More on that below (see point 4)!
2) If you want a better cash rate, you can contribute regularly to a tax-efficient Junior cash ISA. This belongs to the child, so parents will not be able to withdraw money from it. Your child can gain access to the money from the age of 18. Rates are slightly better at 1-2%.
3) Another option is a Junior stocks and shares ISA, which allows you to invest in the stock market on behalf of your child. This means taking on more risk, in the hope of achieving better returns. Just £50 per month over 18 years could generate up to £17,500 (assuming 5% annual growth after charges).
4) Contribute regularly to a Junior SIPP, which is another tax-efficient structure. Again, parents are unable to access the money and the child can only get to it when they are 57 (from 2028). It offers exposure to the stock market and the potential to benefit from compounding returns over the long term.
What do people prefer? Back in November of last year we asked FundCalibre visitors what they thought was the best way to save for a child. The response was overwhelmingly a “Junior stocks & shares ISA” – voted for by 87% of respondents. A Junior SIPP was second (just 7%), with Junior cash ISA and a regular savings account joint third at 3% each. Respondents may have used more than one of the options, but they felt the Junior stocks and shares ISA was the best of the lot.
If you are looking to open up a Junior stocks & shares ISA, here are three funds to cater for different risk profiles…
In this category, I would suggest backing a fund that invests predominantly in equities, but has the flexibility to invest in different geographies or assets. This provides diversification and allows the managers to dial down risk when they feel cautious.
Premier Multi-Asset Growth & Income is a good option for lower risk investors. The team, headed by David Hambidge, aims to achieve long-term growth and a moderate level of income. They keep a keen eye on risk and take a truly multi-asset approach to investing. Over the past five years, the fund has returned 84.9% versus 54.6% by the average fund in the Investment Association’s (IA) Mixed Investment 40-85% Shares sector1. Income is paid out twice a year and the multi-manager fund has a historic yield of 2.4% yield2.
If you are happy to take on more risk, UK smaller companies are a good place to start. Over the long term, some investors in this space have been rewarded handsomely. This is because the best smaller companies today can become the large caps of the future.
Liontrust UK Smaller Companies stands out in this category. Managers Anthony Cross and Julian Fosh look for stocks with three of the following characteristics: intellectual property, strong distribution capability and recurring revenues. With this in mind, the companies they hold tend to perform well through different stages of the cycle. Their five-year numbers are a testimony to this: the fund has returned 152.9%, far ahead of an average gain of 116.8% by the IA UK Smaller Companies sector3.
This fund targets the world’s most innovative, fast-growing companies. It is a great option for parents who are willing to take on more risk in the hope of achieving high returns over the longer term. The team at Baillie Gifford look for businesses that do something different, which may well be loss-making, so long as the team can see future growth potential. For example, Electric car manufacturer Tesla and online supermarket Ocado feature amongst the fund’s largest investments4.
It is an approach that has paid off. Over the past five years, the fund has returned 163.4% – far ahead of 87.2% by the average fund in the IA’s Global sector5.
1Source: FE Analytics, total returns in sterling, 6 September 2012 to 6 September 2017
2Source: Premier Multi-Asset Growth & Income factsheet, August 2017
3Source: FE Analytics, total returns in sterling, 6 September 2012 to 6 September 2017
4Source: Baillie Gifford Global Discovery factsheet, August 2017
5Source: FE Analytics, total returns in sterling, 6 September 2012 to 6 September 2017