As parents around the country make last minute trips to the shops, spending what seems like a small fortune on new school shoes, uniform and stationery, ahead of the return to classrooms next week, it's perhaps sobering to consider that by the end of their education, many children will have debts of £44,0001
My kids are too young to even be contemplating A-levels and universities but, when they do eventually get there, I'd like to be able to give them a bit of a head start. One of the best ways to save early for your children is to set up a Junior ISA, and it need not break the bank of mum and dad just yet! I know I'm hardly the first person to make this point, but with a long-term time frame, small monthly contributions will really add up.
Importantly, while many people will tell you about the benefits of opening an account for your precious newborn when you're basically on your way home from the hospital, I'd really stress that it's not too late to start a few years down the track. Sure, you might not be able to take care of their university fees completely, but you could make a pretty decent contribution.
Let's take a look at this example. If you began saving into a Junior ISA cash account when your child was five years old and put in, say, £50 a month over 13 years until their 18th birthday, you'd have £9,596 (assuming an interest rate of 3%, which is still currently available on some Junior Cash ISAs).
While no 18-year-old I know is going to turn their nose up at that sort of sum, you could potentially boost it quite significantly by investing instead. The Junior ISA also provides a tax efficient wrapper through which you can buy shares, bonds or funds on your child's behalf, up to a maximum amount of £4,080 per year.
The average UK equity fund has returned around 6.7% a year over the past 20 years2. While past performance is no guarantee of future returns, if you were to hypothetically apply this rate to contributions of £50 a month over a 13-year period, this would give you £12,3943. Even if you estimated annual returns at a more conservative rate of 5%, you could still have increased your savings to £11,0074.
For this type of investment, I'd go with a solid, core holding such as Artemis UK Special Situations or L&G UK Alpha, which are both in the Chelsea Selection.
Of course, you may want to diversify and hold a couple of different funds in your Junior ISA to take advantage of periods of strength in different markets. You can easily split a £50 monthly contribution between three funds.
Other sectors to consider could include a European or a US equities fund. I particularly like Baring Europe Select and AXA Framlington American Growth, again two funds on the Chelsea Selection.
One thing to keep in mind with Junior ISAs is that once your child turns 18, the account automatically passes into their control and they can immediately access the money for any purpose they like. You might intend for them to pay off their university fees, but they may well have other ideas! One suggestion I quite like, which may encourage your teenagers to spend the large lump sum responsibly, is to get them to also start contributing a small amount to the account each month during secondary school. This has the double benefit of a) boosting their savings even further and b) getting them engaged with investing from an early age.
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Darius' views are his own and do not constitute financial advice.
1The Sutton Trust, Degrees of debt, April 2016 - £44,000 is the “typical English student debt”, according to the research.
2IA UK All Companies, TR in GBP, 15/08/1996–15/08/2016, accessed 15/08/2016.
3The Calculator Site, Compound Interest Calculator. 6.7% annual interest rate, 13 years, £50 monthly deposit, compounding annually.
4The Calculator Site, Compound Interest Calculator. 5% annual interest rate, 13 years, £50 monthly deposit, compounding annually.