Where should we save £1,000 a month for our children?

Mouthy Money Your Questions Answered panelist Laura Suter answers a reader’s question about finding the most tax-efficient home for their children’s savings.  

Question: What is the best way to save for your children’s future? We have £1,000 a month to save (for two children) and have been advised to put this into an active managed ISA that has fees of 1.87% in our name. Are there more tax-efficient saving vehicles? Would a passive investing approach be better? CR, North Shields

Answer: Firstly, congratulations on putting aside money for your children. It’s often a task on a parent’s to-do list that they never quite get around to. And having £1,000 spare each month for your two children is going to give them a great savings pot for their future life.

Let’s tackle the issue of the account type first.

You could save it in an account under your name, as the adviser has suggested, but this will use up some of your ISA allowance. 

Each adult has a £20,000 annual ISA allowance, so your children’s savings will take a £12,000 chunk out of that for one of you. If you have additional spare money each month that you want to save for yourself, this might prevent you from doing so within an ISA. 

In the worst case you could end up with savings outside an ISA that you then have to pay tax on, that you could have otherwise sheltered from tax in an ISA.

An alternative is to put it in ISAs under your children’s names, in a Junior ISA. Each child is entitled to one of these and you can put up to £9,000 a year into the accounts.

If you split the money between your two children, you’d be putting £6,000 a year into each of their accounts. 

Using a Junior ISA means the money is ringfenced for the child, so you can’t take it out until they turn 18. This has benefits, as you can’t be tempted to dip into it. But it also means you need to be sure that you won’t need it for anything else.

Your next question centres around the type of investment to pick. Your adviser has suggested an actively managed fund, while you suggest a passive approach might be more suitable. There’s no right answer to this, it comes down to preference. 

Put simply, a passive investment approach will cost you less but will only track the performance of the market – never outperform it. With active management you’re paying more to have a fund manager pick stocks for you, but the hope is that this will generate a higher return.

There’s no need to sit entirely in one camp, you could mix the two approaches. For example, having a broader UK stock market tracker and then using an active fund for a more specialist area, such as technology stocks or emerging markets.

Another option is to pick an all-in-one fund, which can be active or passive. These invest in a mixture of different assets and mean you only need to invest in one fund that is already diversified, rather than picking lots of different investments.

When investing for your children it’s important to keep the timeframe in mind. You don’t mention how old your children are, but if they are young you could have 15 or more years until they will access the money at age 18. 

This makes for a decent investment horizon and means you could potentially take more risk with the money, as you have time to ride out the ups and downs of the market. 

Of course, some parents would prefer to play it safe with their children’s savings – it’s down to personal preference and attitude to risk.

Laura Suter is head of personal finance at AJ Bell.

Laura Suter is head of personal finance at AJ Bell. She is a multi-award winning former financial journalist, having specialised in investments. Laura joined AJ Bell from the Daily Telegraph, where she was investment editor. She has previously worked for adviser publications Money Marketing and Money Management,and has worked for an investment publication in New York. She has a degree in Journalism Studies from University of Sheffield.

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