So your little angel has arrived! Now is the perfect time to start planning for their financial future – after all the earlier you start the better! Understandably having a newborn is pretty expensive. But putting aside a little every month can go a long way in the long term. We at Babycchinos understand how important it is to start building a nest egg for your baby. That’s why we have put together this guide to investing for your newborn’s future.
At the time of writing (17/01/2017), the rate of inflation is 1.6% as at December 2016 (source: ons.gov.uk). Inflation is the general rate at which the price of goods and services are rising – or – the rate at which the purchasing power of money is falling.
When looking at saving instruments for your child, it’s important to note that your aim is to get the best rate of interest which is greater than the rate of inflation in order for your investment to actually grow (and not effectively stay the same or even erode over time). For example, if the current rate of inflation is 1.6%, you should aim to invest in instruments which have an interest rate greater than 1.6%.
1) Junior ISA – £4,080 tax free savings
Junior ISAs are the ideal long term tax free savings instrument that every child should really have. This allows you to put away £4,080 a year tax free (the 2016/17 Junior ISA allowance).
The parent can open the Junior ISA account but the funds will legally be owned by the child. The child can start managing his/her own ISA at the age of 16 and can make a withdrawal at the age of 18.
There are two types of ISAs:
1) Cash Junior ISA: The cash stays in a ISA wrapper and the interest earned on the lump sum is tax free.
2) Stocks & Shares Junior ISA: The funds are investment in a portfolio of stocks and shares which remain in a tax wrapper. Any capital gains and dividends realised are tax free.
When the child is 16 and 17, they can claim the Junior ISA allowance AND the adult ISA allowance. At this time, that is £4,080 + £15,240 = £19,320 of tax free savings! (Source: www.moneyadviceservice.org.uk)
Note you can choose to invest in both types of ISA accounts in any given year.
Click here to see the HMRC guidelines on Junior ISAs.
2) Interest on savings
Banks and building societies offer children’s savings accounts. Some offer freebies with the accounts but these usually pay lower interest. Also note you are not limited to opening only one account.
As a parent who is putting funds away for the child, the first £100 interest earned in a tax year on these savings is tax free. Any amount over and above this £100 sum will be added to your (the parent’s) Personal Tax Allowance. To learn more about the new Personal Savings Allowance go the HMRC website by clicking here.
It’s important to note that this rule only applies to money given to the child BY THE PARENTS. Any money given to the child from grandparents, family and friends is not liable to tax (source: www.hmrc.gov.uk).
There are two types of savings accounts:
1) Instant Access Accounts: These accounts are quite flexible in that there in no limited on how much you put in or withdraw, but these usually pay lower interest.
2) Regular Savings Accounts: These require a regular payment into the account (usually with a cap on how much you can put in every month), and sometimes have restrictions on withdrawals. These usually pay better rates of interest. However it has become increasingly common for the interest rates to only be valid for the first year so be vigilant and ensure you look for another good savings account once the year is up, as the interest rates usually drop dramatically.
Picture Credit: Moneyjojo.com
3) NS&I Children’s Bonds
If you are able to put away savings for 5 years at a time, this bond issue may be a good option for you.
The current issue of the NS&I Children’s Bond (issue 35 at the time of writing) is giving a tax free interest rate of 2.5% for 5 years. You can invest from £25 – £3,000 per issue per child. Interest is added at the end of the term, in which you can roll over the funds and invest in a new bond issue, and continue to do so until the child’s 16th birthday. The parent/guardian or grandparents can buy the bond in the name of the child. The parent/guardian or grandparents will hold the bond until the child is 16 years old.
For more information, visit the NS&I website by clicking here.
4) Non-Financial Investments
A unique idea is to think of a gift you would like to give to your child when he/she is older – that is, a gift that will appreciate in value over time. Think of something that is special to you and that has a precious memory attached to it – effectively create your own family heirloom. Examples are a signature timepiece, or a designer handbag which have been argued to be good investments.
Borro.com discuss in their article how a Rolex watch is a good investment and depicts how the price of a Rolex Submariner has shot up in price over years compared to inflation.
For the ladies, Marie Claire explains in their article how the value of a Chanel Medium Flap Bag rocketed in value by 70% since 2010!
Granted, these investments require a large up front cost. But if you are lucky enough to have the means, this option could be for you!
However, it’s important to note the tax rules around gifts and inheritance tax. For more information on this, visit the HMRC website by clicking here.
It’s important to note that saving for your child is a long term investment. As such, it is recommended you constantly revise the instruments you have invested in in order to make sure you are getting the best deal given the economic climate. The key note is that the economic climate is constantly changing and new investment instruments are always being introduced to the market. So keep informed and make sure you are making your money work harder to give your child the best start in life.
Please note we at Babycchinos are not financial advisors and the above information should not be considered as financial advice. We strongly recommend you seek advice from a Financial Advisor before perusing any investments.
Babycchinos is the marriage of parenthood and practicality. We empower the modern day mummy & daddy and are keen to share our products and concepts with all new parents!
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Love, The Babycchinos Team xxx