Protect your child’s future by investing time in a Junior Isa

But be aware that they gain control at 18


THE COST of having children has never been higher. According to research by Liverpool Victoria, parents need an average of £222,000 to bring up just one child to the age of 21 (not at once, thankfully).

The figure doesn’t even include expensive aspirations like your child getting married or his or her first home. And on present trends, prices are only likely to rise. While the average wedding costs a hefty £20,000, Scottish Widows projects those born in 2012 will pay an inflation-adjusted £39,000 just to tie the knot.

The most obvious way to give your child gain a head start is to start saving as soon as possible. Small contributions over a long period make a big difference. Assuming an annual return of 5 per cent, Fidelity calculates that you’d need to save just £15 per week over 18 years to end up with a £20,000 lump sum for a wedding. And with the average London house costing £268,000, and a typical first time buyer mortgage demanding a 40 per cent deposit, saving £250 a month for 21 years would allow you to save the £110,000 required to put your child on the property ladder.

SAVE ON TAX

But to make the process easier, you should also take advantage of tax efficient saving vehicles specifically designed for childhood saving. There are two schemes for children: child trust funds (CTF) and junior individual savings accounts (junior Isas).

Junior Isas replaced CTFs in 2011, which are now closed to new savers (although parents that started saving in one can still contribute). You can’t invest in both in the same tax year, however, as your child would receive double the tax efficient savings allowances. They both exempt investment growth and returns from personal taxes.

Over 71,000 junior Isas have been opened since their launch, according to HMRC, compared to a total of 6m CTFs. Both are similar, allowing you to invest up to £3,600 per annum (rising to £3,720 from April). This is in addition to your personal Isa allowance, so as a family you can quickly increase the total amount you effectively shield from the tax system.

Any money you put in a junior Isa, however, is locked away until your child turns 18. So if you are saving towards school fees, for instance, it may make more sense to invest into your own regular Isa to ensure you have flexible access to the money.

And there are broader reasons to be reticent about the benefits of junior Isas. When a child reaches 18, if the money is not withdrawn, it is automatically converted into an adult Isa, giving the child full access to the money. If you are concerned that your child may spend frivolously, keeping control could be tricky.

TOUGH CHOICES

But the real tough choice that a parent must make before saving is to consider how much risk you are prepared to take. In simple terms, “the fundamental rule is: with the potential for higher returns comes higher risk,” says James Bateman of Fidelity.

But linked to that question is the time horizon you are investing within. If your child is a toddler, you have plenty of time before they need the funds. Generally, this means you can afford to take on more risk, say by investing in a stocks and shares Junior Isa (which functions much like the adult equivalent). If you’re cautious, you can still reduce risk by using tracker funds or multi-manager funds, which mitigate against large losses by respectively tracking indices or investing in other funds. And as your child approaches the age of 18, Bateman says that it makes sense to “progressively lower the risk of the investments,” perhaps by moving into less volatile assets, like bonds, to lock in gains.

Assuming an annual return of 5 per cent, Fidelity calculates you'd need to save just £15 per week over 18 years to reach the £20,000 cost of a wedding.

Using online comparisons sites like CompareJuniorISA.com or moneyfacts.co.uk should be useful in finding and comparing suitable deals. But be careful of apparently high headline rates. While Halifax’s junior cash Isa currently offers an astonishing 6 per cent, for example, this only applies to parents who already hold an Isa with the bank, or for children who are above the age of 16.

ISSUES OF TRUST

Unfortunately for CTF savers, as they are closed funds, they tend to offer less choice, carry higher fees, and provide poorer rates of return, according to Darius McDermott of Chelsea Investment Intelligence. He estimates that CTFs could leave savers £7,500 worse off than by investing the same amount in a junior Isa.

The government is currently consulting on whether to allow transfers across from CTFs into junior Isas. Danny Cox of Hargreaves Lansdown believes that this is likely to happen in 2014. Until then, however, he says it is still worth taking advantage of the tax efficiency offered by CTFs, and parents should not be reticent to switch to trusts that offer better rates and lower costs.

But the key message is to start saving early. It’s the best way of offering your child the security of a large lump sum on their eighteenth birthday.