“An investment account is for life, children, not just for Christmas, so that’s the way we’re going this year.” It’s not a line to endear you to your kids as they scribble their Christmas lists full of Beyblades, Furbies, Airpods and Asics trainers.
But a personal nest egg accumulated during childhood could be a game-changer in the longer term, providing your youngsters with the funding they need to achieve key milestones of adulthood, from driving lessons and a car to a deposit on their first home.
An expensive business
Raising a child is already an expensive business, as every parent knows too well. Research from the Child Property Action Group in 2023 found that on average, the first 18 years of a child’s life cost couples £166,000 and lone parents a hefty £220,000.
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Unsurprisingly, many parents – particularly those with larger families – struggle to cover additional but important one-off outlays as their children fledge the family nest.
Learning to drive and getting a first car, for example, is estimated by the RAC to cost around £7,700 on average. University is another challenge: Save the Student suggests that even if students at British unis take out a maintenance loan, they have to make up a shortfall of around £6,000 per year of study to cover accommodation and living costs.
The average cost of getting a toe on the property ladder is even more daunting. According to Halifax data, first time buyers in the UK now have to put down an average £50,000 deposit.
Starting to save early can generate additional growth over time
These are large sums of money, but starting to save early can make a huge difference. Not only does it mean more time to add contributions, but it also allows the compounding process to work its magic, with reinvested returns generating additional growth over time.
To give an idea of the power of compound growth, let’s say you invest £100 a month into an investment account returning an average 5% for your child from their birth. After nine years, the fund will be worth £13,661. But if you continue for another nine years until their 18th birthday, it will more than double to over £35,000.
A slightly higher-risk fund potentially producing higher returns can make a considerable difference over the long term, too. In the example above, if you opt instead for a fund with total returns averaging 7%, the account could be worth more than £43,000 after 18 years.
This underlines the fact that while it’s quite possible to set up a minimal-risk cash savings account for a child, over a timeframe of a decade plus it makes more sense to set up an investment account that gives exposure to the stock market, where inflation-beating returns are most likely to be achieved.
The Barclays Equity Gilt Study for 2024 (which tracks average asset performance back to 1899) shows that over the past 10 and 20 years, UK equities have outperformed both gilts and cash in real terms, by more than 3% and more than 4% a year respectively. Over 124 years, equities have returned an average 4.8% a year, against less than 1% for both gilts and cash.
Tax-efficient investing matters
If you’re going to invest for your child it’s also important to consider the most tax-efficient way to do so, particularly over a long timeframe.
A Junior ISA (JISA) is an excellent option, ensuring that the investment will grow free of income or capital gains tax, particularly helpful with the UK’s tax burden at record levels.
Once it has been set up by a parent or guardian, anyone – grandparents, godparents or generous uncles, for instance – can pay into it, up to a total of £9,000 each year. Making regular contributions from your earned income is painless and a great savings discipline, but you can also make ad hoc payments.
Either way, the account cannot be accessed by anyone until the child reaches 18, when it automatically transfers into their name.
That’s likely to be fine if your youngster is level-headed and responsible, but parents of more wayward children might prefer an alternative route, albeit taxable.
A designated account (opened in the parent’s name but with the child’s initials as an indicator) allows parents to decide when the money should be handed over. Parents need to be aware, however, that because the money effectively remains in their name, any income or gains generated will be taxed as theirs.
Investment JISAs and designated accounts are widely available and easily opened through online platforms such as interactive investor.
Once you’ve set up your child’s account, you’ll need to choose a fund or investment trust for the money coming into it. To keep things simple, it makes sense to select one or two ‘core’ broadbased equity investments covering a range of different markets.
Investing for children with abrdn
abrdn’s range of investment trusts is a good hunting ground. A strong core contender would be Murray International, a highly regarded global trust investing across multiple markets.
UK choices include Dunedin Income Growth and Murray Income; or if you’re comfortable with a little more risk in return for potentially higher growth over the long term, you could tap into abrdn’s longstanding Asian expertise, for example through abrdn Asian Income Fund.
In each case, the dividend income generated can be reinvested into additional shares, helping to boost long-term growth through compounding.
An investment account may not have the playground or pulling power of the latest must-have accessories this Christmas morning – but treat it right and it could produce a nest egg to take your kid’s breath away in years to come.
Find out more at abrdn.com/children or by registering for updates. You can also follow us on X, Facebook and LinkedIn.