Investing for your children, how to build a head start

Giving your child a financial head start. Many parents think about it, but where do you begin? Investing for your children might sound complicated, but the principle is simple: you set aside an amount monthly and let time do the work. And time is exactly what children have.

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Why time is your greatest asset

When it comes to investing, it is all about the long term. Through compounded growth, or returns on returns, your capital grows faster and faster as the years pass. A newborn has eighteen years until adulthood. That is a huge head start.

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A calculation example: if you deposit fifty pounds per month at an average return of seven per cent per year, after eighteen years you will have around £27,500 to £30,000. Your total investment? Only £10,800. The difference comes from returns. At a hundred pounds per month, this grows to £55,000 to £60,000. Time literally makes money.

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Saving or investing for your children?

Approximately sixty to seventy per cent of parents save for their children. Only ten to twenty per cent invest. Understandable, because saving feels safer. But in a savings account, your money slowly evaporates due to inflation. Historically, investing has yielded more than saving over the long term. Especially with eighteen years ahead.

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This is about flexible investing for your child, for example for studies or a starting capital. Not about pension investing in the child's name.

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What about taxes?

Assets of children under eighteen count towards the parents' assets in box 3. However, the exemptions are relatively generous: approximately €57,000 per person and €114,000 for tax partners. You only pay wealth tax above that amount. For many families, this means that the savings or investments for the children are not taxed.

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Additionally, parents can gift around €6,600 tax-free to their child annually. Useful if grandparents want to contribute.

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What should you look out for?

Costs make a huge difference, especially over long periods. A cost difference of one percentage point (one percentage point = 1%) per year leads to about 25 to 30 per cent less final capital over thirty years. Therefore, choose low costs.

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Furthermore, behaviour is crucial. Research shows that private investors achieve an average of two to four percentage points less return than the market, mainly due to emotional decisions and poor timing. Periodic and diversified contributions work better than trying to predict the market. Those who start small and stay consistent are less likely to stop after a market dip.

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Start small, end big

You don't need to start with large amounts. More than forty per cent of beginner investors start with less than a thousand pounds. The most important thing is that you start and keep contributing. Broadly diversified index funds with low costs historically provide the best balance between risk and return over long horizons.

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Want to start investing for your child? View the possibilities for goal-based investing and pension investing and discover how you can build wealth step-by-step for your family's future.

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