Alternatively, if you invested £25 a month into a stock market-linked account, and it grew by 4% a year after charges, they would end up with £8,000 when they reached adulthood, according to the investment provider AJ Bell.
“While some of the recent market falls may have put parents off investing for their children, this could be an opportunity to make long-term gains,” says Laura Suter, head of personal finance at AJ Bell.
Be tax efficient
Every child can have up to £9,000 saved into a junior Isa (Jisa) on their behalf each tax year.
There is no capital gains or income tax to pay on these accounts, and you can choose whether to save in cash, stocks and shares, or a mix of both if you wish. The child’s parent or legal guardian can open a Jisa, but anyone is able to contribute to it, such as family friends or relatives.
Children aged 16 or over can apply for an adult cash Isa, and save up to £20,000 in it this tax year.
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However, they can’t invest in a stocks and shares Isa until they’re 18. Money saved into a Jisa can be rolled into an adult Isa.
The money is locked away until the child reaches age 18, when they can withdraw it.
The child then automatically becomes the account holder, so if they wish, they can withdraw and spend the lot … whether you like it or not.
Decide on risk
Despite the turmoil over recent months, most experts believe the stock market is the right place to save for a young child. As the money will remain invested for decades, it has time to ride out the market’s highs and lows, and shares typically produce a better return than cash over the long term.
“Over the past 35 years the FTSE 100 has delivered a 3.6% average annual return,” Suter says.
Over the same period, the MSCI World Index – which tracks medium and large companies in more than 20 countries – has delivered 6%. “During this time there have been significant falls and market rebounds,” she adds.
If the money does not need to be used on a particular date, you should be able to sit tight through stock market jitters.
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