How to build a nest egg for your children
Here are some tips on how to save for your kids.
One of my colleagues at lovemoney.com came over to my desk yesterday and asked for advice on how to build a nest egg for his children. Let’s call him Dan (not his real name). Dan wants to create a fund that could help his kids if they go to university in around fifteen years’ time.
I thought I’d share my thoughts with lovemoney.com readers as well as Dan himself....
The hardest part
I reckon the hardest part of building a nest egg is finding some spare cash for your kids in the first place. If you want some help on this, check out my video: How to save when you’ve got no money.
However, Dan is lucky. His children have benefitted from a small inheritance, and he can probably spare some cash from his salary if he’s careful.
Where should the money go?
So the next question is: where should the money go?
The low risk option is cash in a bank. Trouble is, interest rates are very low at the moment. So it’s essential to find a savings account that pays the best rate.
The good news is that many banks offer children’s savings accounts which pay higher rates than your normal account.
My favourite account at the moment is the Halifax Children’s Regular Saver. It’s a one-year account that currently pays 6% interest. Dan could open the account with £10 to £100 in cash and then must pay between £10 and £100 into the account each month. It doesn’t have to be the same amount each time.
On the downside, the interest rate could be reduced at any time during the year. What’s more, after 12 months the money will be transferred into an easy access account that may pay a poor rate.
So after a year, Dan will need to switch the money into whatever is the top-paying account at that time. What’s more, thanks to the inheritance, he has a lump sum to invest which is larger than £100. So he can’t put all the money in the Halifax account.
Take the risk
For the lump sum, I think he should at least consider the stock market. Yes, the stock market can be very volatile, but history suggests that shares normally do better than cash over long periods of ten years or more. (They normally do better, not always). If things go well, you might get a return of 5% a year on top of inflation.
The cheapest and simplest way to invest in the stock market is to use a stock market tracker fund.
Wrap it nicely
Once Dan has decided how to invest the money, it’s time to think about the ‘wrapper.’ If a parent puts money into a Child Trust Fund or one of the new government’s new Junior ISAs, he won’t have to worry about tax and his life will be simpler.
Unfortunately, Child Trust Funds have been abolished for babies born in 2011, but Dan’s children were born between September 2002 (when child trust funds were introduced) and the end of last year. As a result, he can carry on putting money into his kids’ existing Child Trust Funds. Up to £1200 can be paid into a fund each year.
Thanks to the inheritance, Dan has more than £1200 to invest for each of his children, so he can’t put all the money into a Child Trust Fund. He might be able to put surplus cash into a Junior ISA when they’re launched later this year. However, it’s still not clear whether a child will be able to have a Child Trust Fund and a Junior ISA at the same time.
Another option would be to set up a pension fund for each child. The government would then boost the value of the payments by 20% but, on the downside, the children wouldn’t be able to access the cash until they’re 55.
Alternatively, Dan could stick the money in a normal savings account or tracker fund, and not benefit from a wrapper. If he does that, he needs to be aware of some tax issues – find out more in lovemoney.com’s guide: How to save for your child’s future.
Dan should also think about his goals for the children. How much money will a child need to get through university? Under the government’s new scheme, the maximum university fee will be £9000 a year. Add in living costs of, say, £5000 a year, and your child will need £44,000!
Now I recognise that Dan isn’t rich enough to save that much cash, but it’s still worth thinking about goals, and about ways to get as close to those goals as possible. Dan should draw up a financial plan with realistic targets and then do his utmost to stick to it.
Planning is a really important financial tool for all of us, so I’ll be writing more about this issue over the next few weeks.
Since Dan’s children are young – they’re all under 8 – I reckon he should take the risk and put the inherited money into a tracker fund. The kids won’t need the money until they’re 18, so they’ve got at least ten years to ride out the highs and lows of the stock market rollercoaster.
The tracker fund could be placed in a child trust fund wrapper – a self-select child trust fund gives the most flexibility. 4thekids.co.uk is one provider.
If he has surplus cash once he’s done that, he should see if he’s allowed to open Junior Isas for his kids later this year.
When Dan saves money from his salary each month, he could put the money into a savings account so that his children aren’t 100% exposed to stock market risk. Halifax’s account would be a great first choice for that cash.
So Dan, that’s the end of my advice. It’s up to you now!