How should you invest in your children's future?
by David Battle on 02·12·2021
When my daughter was born my wife and I brought her home, put her into a little basket and just looked at her with no idea what to do.
After many moments of mild panic, I concluded that I would probably be most helpful in planning to start saving for her future. A couple of nappy changes later I was convinced that should be my role.
I headed downstairs away from the troubles. I ‘thoroughly’ looked at the options and as always the ISA was a comfortable starting point.
The limit for a Junior ISA for the 2021/22 tax year is £9,000. Assuming no increase or changes over the next 18 years this could mean a potential £162,000 deposited into a Junior ISA.
Based on a return of 2.50% (which is currently achievable for a cash holding even in these low interest rate periods) this could mean a sum of £207,105 is available for said child at age 18. With a competent investment strategy, the sums could be considerably larger.
This seemed a very attractive proposition. Even if I didn’t quite achieve the full limits a handsome sum beckoned for my daughter. Think of the options for her. At that point she could perhaps purchase a Bin Stall in Central London or even become a Tory Donor for no reason at all.
I laid back and relaxed with the simple plan formulated.
Coming from a working-class background I dreamt of what I could have done with a sum like that at 18. It would have come at a great time. Off to university with full control of £207,105. I probably would have upgraded to potatoes from powdered mash amongst other possibilities (although that was probably an option anyway). I had just gone on holiday to Spain with the ‘lads’ before we went our separate ways. We probably would have used a plane as opposed to going on a coach for 36 hours. We would have bypassed the shock of French toilets for one. Endless improvements.
Gradually it dawned on me what an absolute nightmare it would have been for me to have that sum at that age. I was a shambles. A rebel with literally no cause other than successfully avoiding lectures and seducing my future wife with the cheapest cider available.
It felt like a moral dilemma to me. I wanted to provide a sum for my daughter in the most tax efficient way but not to a degree that could actually create an unpalatable scenario.
I am not complaining about the amount you can invest as the reality is you can contribute as much or as little as you like. I suppose it made me think that surely at age 18 there should be the option for the parents to continue to control the funds until they felt the child was mature enough to manage the money.
Whilst we all dream that we bring our child up to be mature and sensible we all know this can happen at different ages. It may be that you feel when they are 25, for example, they are more in the real world. They may be working with a good job and a steady relationship, and they have real ambitions such as to purchase a house. This could be a good time to then pass control over.
I am proposing this change to put my mind at rest. Let the parents decide the age to gift the monies over allowing them to maximise the investment advantages for the child without the worry of gifting over control when they are not ready. Probably too sensible an idea.
Until then, if you are recommending that clients start investing for their children, it is really important to build that into your annual periodic suitability review.
It is a crucial time when the client’s objectives and the children’s objectives are both equally important. Engaging with the children will secure them as clients.
Afterall, if everyone keeps just chasing the older clients who already have the money, at some point we’re going to end up down a rabbit hole with lots of dead clients and businesses with decreasing value as the assets are going somewhere else.
Engaging with the children might future proof your business for you and increase the business value for your successor.