When it comes to our children, there are all sorts of risks we are not prepared to take. We use two thermometers and an elbow to check the bath water isn’t too warm, so we are unlikely to want to risk the kids getting into hot water financially either. It means that when we’re choosing investments, the vast majority of people err on the side of caution. As Ashley Clark, a director of needanadvisor.com, says ‘The default option for parents is to play it fairly cautiously for their children.’
There are some investors for whom the cautious approach makes the most sense. If, for example, the child is a bit older, and you expect to need the money within five years, the markets will an inappropriate for most investors.
As Julie Hedge, an adviser with Christie Scott’s, says, ‘The less risk you want to take, the longer the period you need to feel comfortable in the stock market. If you’re very risk averse you may need ten years or more, and you may not have that kind of time.’
In addition, if you really are uncomfortable with the thought of losing a penny, even over the short term, share-based investments like unit trusts or open-ended investment companies may keep you up at night, and with kids in the house, you’re going to have quite enough sleepless nights as it is. There are, therefore, savers for whom a secure investment is vital, and for these people cash-based investments are going to be key.
The question of identity
The first choice a parent needs to make is whether to save in their child’s name or their own. Saving in your own name has a number of advantages. It gives parents ultimate control of the money if life changes and they need to spend it elsewhere. It also eliminates the danger that they end up being forced to hand over a sizeable sum of money to a child who has been unable to grasp the concept of sensible money management.
The first port of call for these sorts of savings is often a savings account. Instant-access accounts offer simplicity and accessibility. They appeal to parents who want an immediate financial solution to any family hiccups, and they boast some decent rates too. At the moment, ICICI Bank is offering an annual equivalent rate (AER) of 6.41 per cent, Sainsbury’s 6.25 per cent and the Yorkshire Building Society 6.2 per cent.
If parents are willing to forgo a bit of flexibility on access, they could earn a bit of extra interest. The Whiteaway Laidlaw Bank, for example, offers a 90-day notice account with an AER of 6.51 per cent, while the Nottingham Building Society has a 60-day notice account with a rate of 6.45 per cent.
However, if you opted for cash because of its flexibility and accessibility, locking it away may end up undoing these benefits. If you are keen to squeeze every ounce from your cash investments, you may consider this worthwhile. Otherwise, as the extra interest is relatively marginal, it is worth weighing up whether it’s really worth losing the flexibility.
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