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Please note that tax, investment, pension and ISA rules can change and the information and any views contained in this article may now be inaccurate.
Every parent wants to ensure their child grows up in a safe and happy environment. Buying them a house is beyond the ability of most people. Helping them get enough money for a deposit looks a more realistic goal.
Why not get in the habit of saving money each month from birth. A small amount of cash can turn into a hearty sum by the time they become an adult, if the stock market works in your favour.
Rocketing house prices and harsher lending criteria mean first-time buyers are now putting down an average deposit of £35,870, according to research by Which?.
You can try to amass this amount of money by putting away £100 a month into a Junior ISA from when your child is born until they reach age 18, assuming you can achieve an annual return of 5 per cent on the stock market. If your son or daughter is six years old you’d need to save £180 a month and achieve an annual return of 5 per cent.
You won’t be able to achieve this rate of return from a cash account, but it could be possible through a stocks and shares Junior ISA. The FTSE All-Share Index has provided a compound annual return of 7 per cent since its inception in 1962 with a 3.5 per cent yield on top of this. You must remember that past performance isn’t a guide to future performance. This is not a guaranteed rate of return.
If you opt for regular investing – paying money into funds or shares each month rather than via a lump sum – it costs £1.50 for each trade you make via AJ Bell Youinvest. There is also a fund custody charge of 0.2 per cent per year.
Once you’ve opened a Junior ISA you need to choose which investments to put in a portfolio. The benefit of investing for your child is you have a very long investment horizon. You may wish to take on extra risk, perhaps by investing in emerging markets and AIM-quoted stocks, to try and achieve extra returns.
An example of an emerging markets investment collective is JPMorgan Emerging Markets Fund, which has a 10-year annualised return of 5.65 per cent. As your child won’t need an income you should opt for the ‘accumulation’ version of funds, as this will ensure the income produced by the fund is reinvested and you could enjoy compounding benefits.
The maximum amount you can invest in a Junior ISA each year is £4,080 and any gains you make are tax-free. Once your child turns 16 they can manage the Junior ISA themselves. They can access the cash on their 18th birthday.
This article is provided by Shares Magazine. Shares publishes information and ideas which are of interest to investors. It does not provide advice in relation to investments or any other financial matters and does not guarantee the accuracy or completeness of the information in this article.
Investors acting on the information in this article do so at their own risk and AJ Bell Media Limited and its staff do not accept liability for losses suffered by investors as a result of their investment decisions. Shares is published by AJ Bell Media Limited part of AJ Bell.