Saving for a child – advice sought

bpk101

Hi —

My OH and I have decided to open a savings account for our son for his upcoming second birthday (something we meant to do at birth but then pandemic etc. etc.). We're looking at a Junior Cash ISA and the plan is fairly typical in that we're hoping to save a pot for them to use towards university fees or a mortgage deposit etc. I have a couple of questions regarding this...

1) Given the well documented risks associated with Junior ISAs and handing over a relatively small fortune to an 18 year old without any real control over what they use it for, are we better off saving a portion in a JISA that they do get access too, then another portion for them elsewhere that we control, just in case? Or should we just commit to an amount and put it all in the JISA?

2) What is a reasonable and responsible amount to save given the risk mentioned? I know it's all relative but i'd be interested to hear some thoughts as it's quite difficult to gauge. My OH is of the opinion that the more money they have saved the better. I'm a little more risk adverse and subscribe to the old saying 'give them just enough to do something, but not too much that they don't need to do anything'.

£200 a month would amount to approximately £50k in 16 years (based on a 2.5% interest rate). Whilst it would almost certainly cover 3 years of university tuition fees and be an incredible gift, it's nowhere near the (current) £9000 a year JISA saving limit... but i'd be terrified handing over any more than £50k to an 18 year old.

Thoughts?

Nurse2047

Due to his age a stocks and shares isa would grow alot more and beat inflation. I would open a S+S isa in your name and a child JISA and invest small amounts into JISA and more into yours so you have more control. This is what i do but others may have better ideas.

https://youtu.be/isq_2tw6pdQ This video is helpful to understand how compound interest works 

MX5huggy

As you’re looking at 16 years plus you should be looking at Stocks and Share investment. Then unless you have both used up your own ISA limits (£20k each per year). I would just use this before using his JISA allowance (£9k per year). The only difference is the lock that applies to the JISA, and maybe someone like Fidelity don’t charge a platform fee for JISA (that is a saving of 0.15% over Vanguard for example).

bpk101

I should add, we are more keen on the idea of locking these savings away and out of reach to avoid any temptations years down the line (e.g. for home improvements that we promise to replace but never do!)

Is a Junior Stocks and Shares ISA a preferable option and what kind of risk is involved? 

OuterNet

A savings account is preferable if you want your cash to be guaranteed, but it is unlikely to keep pace with inflation so it will increase annually while losing real terms value. If you use a S&S investment "your money can go down as well as up" however if you stick with it for 16 years while you may have years where the investment loses value over such a long period of time it is likely to go up and has the potential to increase significantly. Like pensions, money that you are going to lock away for such a long time can be invested to give you a better return. The level of risk depends on what investment funds you choose within the S&S ISA, some are 'less volatile' so should increase and decrease more steadily than a 'more volatile' or higher risk investment where you could be a big winner some years or a big loser others.

Personal view (not advice) is take some risks now, and possibly look at reducing the risk level when you get near to the time you child will need the cash. The Vanguard Target date funds would do this automatically for you.

Malthusian

bpk101 said:

I should add, we are more keen on the idea of locking these savings away and out of reach to avoid any temptations years down the line (e.g. for home improvements that we promise to replace but never do!)

Is a Junior Stocks and Shares ISA a preferable option and what kind of risk is involved? 

You will have to decide how much you want to balance the risk that you squander the money on home improvements with the risk that your son squanders the money at 18 on whatever he wants.

You can either lock the savings out of your own reach or lock the savings out of your 18+ adult son's reach but not both.

The only effective measure to stop an 18 year old squandering their own money is to ensure they are educated about money and experienced in handling it from an early age. (All other solutions involve them not having "their own money" in the first place.)

The risk of a S&S ISA is that you either mismanage the money or panic and cash in the funds while the markets are down (like they were last year).

bpk101

Any thoughts on a savings target? Be keen to hear what people think is a healthy / helpful amount for an 18 year old to receive. 

MoJoeGo

bpk101 said:

Any thoughts on a savings target? Be keen to hear what people think is a healthy / helpful amount for an 18 year old to receive. 

Totally subjective and will depend on parents own situation, standard of living, disposable income, aspirations etc... what my 2 will get control of at 18 would seem astronomical to some, perfectly reasonable to others.

My own view, put aside as much as is tax efficient, either for you or for them, and that you can comfortably afford. Doesn't hurt to think of this as the start of an estate planning exercise for the future. Bear in mind you may need to rebalance if more children materialise in future!

Plus as said before, you should be INVESTING, not SAVING given the timeframe... otherwise very likely that whatever you put away today will be eroded by inflation on 15 plus years time.

bpk101

All advice points to investing rather than saving, which does make sense thanks. 

However i'm a complete novice to this sort of thing and my OH wants the account set up before his birthday (2 weeks time). I've done a preliminary bit of research into S&S ISA's but it all feels quite overwhelming.

Am i best to find an IFA to help me set up and manage the funds or is this something people tend to do themselves?

If the latter, should i just open a Cash JISA now and have the provider transfer it to a S&S JISA at a later date once i understand everything a bit more?

Thanks again. 

MoJoeGo

bpk101 said:

All advice points to investing rather than saving, which does make sense thanks. 

However i'm a complete novice to this sort of thing and my OH wants the account set up before his birthday (2 weeks time). I've done a preliminary bit of research into S&S ISA's but it all feels quite overwhelming.

Am i best to find an IFA to help me set up and manage the funds or is this something people tend to do themselves?

If the latter, should i just open a Cash JISA now and have the provider transfer it to a S&S JISA at a later date once i understand everything a bit more?

Thanks again. 

No one on here will give you 'advice' as such on products, but there are some guides on this site that indicate popular/easy/cheap DIY options without the need for an IFA. Throwing one out there that is much discussed - Vanguard - cheap fees, easy (IMO) to set up, and a simple range of funds (the "LifeStrategy" series, also abbreviated to VLS here) that provide a decent level of investment diversification (ie "spread the risks across the market"), and have different versions based on your attitude to risk - from VLS20 to VLS100.

It's not perfect, for example there are criticisms here about too much 'home bias' towards UK investments in their funds. But for a quick, easy and cheap option where you can invest and forget for the long term, it's a good starting point to look at.

And no I don't work for them, but I've got quite a lot invested in their funds!!

Mojisola

bpk101 said:

my OH wants the account set up before his birthday (2 weeks time). I've done a preliminary bit of research into S&S ISA's but it all feels quite overwhelming.

Don't impose an unnecessary time limit on your research - give yourselves time to make the right decision.

If you want the money to become your son's from his birthday, start putting it away in your savings while you sort accounts out.