The best financial choices a parent can make
Parental love is the essence good parenting; but in a material world where prices are constantly escalating, and getting started in life is becoming ever more difficult for young people, the wise parent needs to think early about making sound financial choices for their offspring.
If you are a parent and you are researching the best savings and investment vehicles on offer for your young ones, you will be spoilt for choice. You can choose from baby bonds, (formerly children's bonus bonds), Child SIPPs, Child Trust Funds or Junior ISAs, Regular Savings Accounts, and Trusts.
For the uninitiated, this wide range of choice can be somewhat confusing and intimidating. To help you to formulate an opinion, we will give you a quick summary of what these various offerings are and how they work.
Baby or Children's Bonds
Baby bonds and children's bonds are one and the same thing. Basically, they are 5-year renewable bonds which are tax exempt. Interest is paid annually. At one stage, these bonds used to pay out a bonus if held for the full term of 5-years. They were called Children's Bonus Bonds. The bonus offer was withdrawn several years ago, and the word "bonus" was dropped from the name. Bonds can be cashed on the 5th year closest to the child's 16th birthday, after which they stop earning any interest.
These are government backed bonds so they are considered quite safe. As with any investment however, the safer it is considered, the less interest it makes. Baby/Children's Bonds are priced anywhere from £25 up to £3,000 per bond, and you can apply for them via NS&I (National Savings and Investments).
There are various other types of Child Bonds available such as the Child Bond that Scottish Friendly offer. You can start up one of these bonds from £10 to £25 per month. On your child's 18th birthday, or after an investment a period of 10-years, the child will be given a guaranteed sum of cash on his or her 18th or 21st birthday. Baby/Children's bonds are only available for children under the age of 16. They must, however, be resident here in the UK.
Child SIPPs are effectively pensions for children for when they reach retirement age. As a parent, if you are forward looking enough, you can start investing from when your baby is born. If you paid say £2,800 per annum into this type of SIPPs, at an interest rate of 5% for example, your child would get £1,053,405 when he/she reached 65 years of age. The drawback is that the funds cannot be accessed until the child 55th birthday. You can find out more about a Child SIPPs from the Your-Money.com website.
Junior ISAs (JISAs) came on the scene back in the year 2011. They replaced Child Trust Funds. The assets held under JISAs can be in the form of cash, stocks and shares, or a combination of both. The annual savings limit is £4,000 and children can access the funds from the age of 18. Some parents prefer to invest in an Adult ISA for the benefit of the entire family.
JISAs offer good interest rates. However, one must always take the potential volatility of the stock market into account. As JISAs are normally taken out for long durations, they do stand a good chance of riding out any stock market crashes, but the risk must always be borne in mind.
Regular Savings Accounts
Regular Savings Accounts are just as easy to set up for children as they are for adults, and they work on the same principles. The savings are readily accessible without notice, but the penalty for easy access is the poor interest rates these types of accounts offer.
Because of the poor interest rate that Regular Savings Accounts offer, some parents prefer to invest on behalf of their children through Cash Saving Notice Accounts and Fixed Rate Bonds. These not only offer a better interest rate, but if you have more disposable income, you can also invest more money per annum than you can in a JISA.
A Trust Fund is an account whereby a trustee or several trustees are legally bound to be responsible in managing the assets for the named beneficiaries. Assets can be in the form of buildings, land, or stocks and share, etc. A "Bare Trust" allows a child to access their funds when they reach 18. â€œDiscretionary Funds" give the trustees the decision as to when to release the funds and how much to release.
Get sound advice
Investing money is a complicated business. There are lots of pitfalls you need to be aware of, and for that reason you should talk to an FCA approved IFA (Independent Financial Advisor).
A good IFA will not put you under any pressure. They will simply inform you of the options open to you and can explain more about any of the investment vehicles we have talked about here in this brief article. Always be aware that investments can go down as well as up, and keep your attitude towards risk firmly in mind.
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