DIY Investor Magazine
/
December 2015
25
CHILD SIPP
Establishing a SIPP (Self Invested Personal Pension)
for a child may allow you to help them throughout
their working life. This is a very long term investment
which could be the ideal vehicle to benefit from the
performance of stock-market investments. The annual
contribution limit to a Child SIPP is £2,880 which is
topped up to £3,600 by the government in the form of
tax relief.
By maintaining this level of contribution from birth to
aged eighteen and achieving an investment growth rate
of 5%, your child could have a pension pot worth more
than £700,000 when they hit fifty five.
Compared to the average pension pot in the UK
of £30,000, your child would effectively have their
retirement taken care of before they go to university,
but that money will not be accessible until they reach
retirement age. However austere it sounds to be part of
‘Generation Lost’ it can only be hoped that as a society
we are empathetic with a very large number of people
that will almost certainly be less well off than their
parents and that the financial services industry will be
creative in delivering solutions to those facing very real
financial challenges.
Improved levels of financial literacy will help today’s
parents to make things better for their offspring if they
are able to establish a savings and investment regime
on their behalf early. Parents and step-parents can gift
their children as much money as they like, but there is a
rule that the money can only earn up to £100 in interest
a year tax-free. Money given by grandparents and other
adults is not subject to this cap.
Investing for children is a long-term game, so you can
afford to take more risks than you might do with your
own money but you should still make sure that you
create a balanced portfolio to ensure that your risk is
spread across sectors and asset classes.
Unless you are a dedicated DIY investor then picking
individual shares may not be the best move; a fund or
investment trust will allow you to spread your risk and
require less work.
Try to select a complementary range of investments,
balancing growth investments – those in companies
where you expect to see a rise in their share price
over time and mainly deliver returns – with income
investments – companies that pay dividends which can
be reinvested to deliver solid returns from compounding
over time.
Charges are a key consideration - high management
fees eat into returns and over 18 years this can deliver
a sizeable drag on how much an investment makes for
your child.
Passive tracker funds carry low management charges –
the HSBC FTSE 250 Tracker, for example, which tracks
the mid-share index has an Ongoing Charges Figure
(OCF) of 0.17% and the Vanguard FTSE 100 UCITS
ETF has an OCF of just 0.09% - whereas some contend
that the improved returns from a good active fund
manager more than justify the additional cost; choose
wisely though because many active funds may charge
handsomely yet still under perform passive index
trackers.
Increasingly popular are investment trusts which offer
a managed portfolio but with low fees. With so many
things to consider, it may just be too tempting to let
April’s ISA deadline slip and ‘start next year’ – but
then spare a thought for those facing student loans of
£40,000 and struggling to get on the property ladder
– and think what even a modest regular savings and
investment plan could do to help your children become
part of ‘Generation Found’.
