Investing in a child's future
Every responsible parent wants to do the utmost to ensure that their child has the best start in life - and a financially secure future.
CHANGING TIMES: Graeme Cumming
Grandparents and parents alike will inevitably nurture dreams of being able to provide their children with a sound school education, send them on to university, or give them a car as a 21st birthday present.
And the sooner you get down to planning the better. The machinery is now in place, for example, to provide your children with their own pension fund before they reach their first birthday.
But before deciding on how you will salt away the cash, weigh up all the alternatives and choose the route that suits you best.
"Traditionally, parents, godparents and grandparents have used bank accounts and National Savings Children's Bonds, but as times change and our level of investment understanding increases, other options become apparent," said Graeme Cumming, Investment Manager with Save and Invest.
"The current economic environment has an important part to play in this. UK interest rates are at a 40-year low and this translates into significantly lower returns from deposit accounts and National Savings."
Although many parents will have taken note of diminishing returns on their own equity-linked investments over the last two years, advisers point out that it's a different prospect where long-term investment for children is concerned.
The time scale involved - from a child's birth to his or her 18th or 21st birthday - offers the opportunity to weather short-term volatility and to reap considerably higher rewards than those available elsewhere.
As with all investment, there are four key areas - performance, flexibility, risk levels and tax.
Investing for children should never mean compromising on performance potential, adds Graeme Cumming. "Just because it may be investing small amounts does not mean that you should forget about demanding competitive returns.
"Look for both above-average performance and consistency over a range of time periods.
"Flexibility is important because you don't want to be locked into underperforming funds. Investing over a long period can also see investment conditions change. An evaluation of risk is vital before deciding on any investment. In general, there is a trade-off between risk and return. The greater the risks you accept, the higher the potential returns should be.
"Equities are more volatile, or risky, than bonds and cash, but, over the long term, history has shown that they outperform both other asset classes.
"The thing to remember about risk is that the longer you remain invested, the less impact short-term stock market volatility has on the total return and in this way, time favours the long-term equity investor."
Unfortunately, tax is often forgotten about when investing for children. Children have their own personal allowance for income tax and annual exemption for capital gains tax however parents need to be careful when investing for their children, as any income over £100 per annum will be treated and taxed as theirs and not the child's. This does not apply to grandparents.
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