I want to invest for my soon-to-be-born baby from birth, what is the best way?

My partner and I are expecting out first child at the end of July. I would like to put some money away for them at birth and then yearly until they are 18. 

I started investing for myself at the start of 2023, putting away £150 a month, every month. 

I would like to do a similar thing for my new son, but would be doing £600 a year in a lump sum, equivalent to me saving £50 a month.

I am long-term minded and realise that an 18-year time period is a good amount of time. 

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My partner and I are lower-rate taxpayers and don’t use anywhere near our personal Isa limits. 

My partner is going to start a savings account as she has very little risk appetite when it comes to money. I am set on going down the investing route. 

My question really is what is the most practical and tax efficient way of investing for my son’s future? What would be seen as a fairly good long-term strategy. 

For example, would I be best using my own Isa allowance to give me more freedom, or a junior Isa? 

Would a simple S&P 500 ETF be most efficient or would an active fund like Scottish Mortgage be more fitting for an 18-year time period? M.D via email

Harvey Dorset of This is Money replies: Firstly, congratulations on your pending arrival, but secondly, congratulations on having the forethought to plan financially for your son.

Investing in your child’s future is something most parents will consider, but doing so early will give you the best opportunity to grow this investment, giving your child as much money as possible to get on the housing ladder or buy their first car.

In saving for your child’s future, the way you go about it will also affect what kind of return you can expect when it comes to cashing out on your investment.

Of course, there are a multitude of ways to go about saving for your child, and a number of things that will sway the decision you make.

For example, opting for a Junior Isa is great as it frees up your Isa allowance for more saving on your end.

But as you say, you’re unlikely to max this out anyway, given the allowance is a generous £20,000 a year and it also gives your child control of the money when they turn 18. 

This isn’t a problem if they are responsible, or need the money to buy a car, but not such an ideal choice if you think they’ll spend it on holidays when you had it earmarked for a deposit on a house.

As you are set on the investing route, you need to weigh up the amount of risk you are willing to take, versus the fees that you can expect to pay for management.

I spoke to two financial advisers to find out what they believe is the best way for you to invest in your child’s future.

Aaron Banasik, independent financial adviser at Ascot Lloyd, replies: Investing for a child can lay a strong foundation for their adult life, enabling them to fund potential university costs, deposits for a property purchase, or even to help towards pursuing a career. 

It’s great to hear that you are both being proactive in planning ahead for your soon to be son.

A Junior Isa is a promising avenue for long-term savings. 

Not only does it provide tax-efficient savings for children, ensuring returns are exempt from both income and capital gains tax, but with an 18-year time horizon, it also can provide compounded growth as your son won’t be able to access the funds until he reaches 18 years old. 

For an even longer-term perspective you can also set up a pension for a child and contribute up to £3,600 gross (£2,880 net of tax) but of course they would not be able to access the money until the minimum pension age).

The only downside to the Junior Isa is that when your son reaches age 18, he will have full control of the account and it will be converted into a standard adult Isa, therefore once he turns 18 he is legally able to withdraw the funds and use them as he sees fit. 

If you save within your own Isa, then you retain control but you would perhaps want to use a different investment within the Isa so can more easily keep track of nominally your son’s funds.

In the current tax year, the Junior Isa allowance stands at £9,000, providing ample room for savings beyond the initial £600 yearly contribution if its affordable. 

This flexibility allows for further accumulation of funds until the end of the tax year on April 5, for example if grandparents want to contribute. Allowances can of course change.

When considering what investment strategy is the correct one, we need to establish the difference between the two, that is passive vs active.

Active management

Active Investment management involves the manager actively buying and selling shares or funds to outperform the market. 

The manager uses research, analysis, and expertise to buy low and sell high, employing strategies like value or growth investing. 

The advantage is the potential for higher returns, but it demands significant time and resources, but attracts much higher fees due to professional management.

Passive management

Passive investment management involves investing in a portfolio that tracks an index like the S&P 500 or FTSE 100 or a mix of global indexes. 

Passive managers aim to match market returns without actively buying or selling securities.

This approach demands less analysis and attracts much lower fees compared to active management.

Investors can also opt for a blend of active and passive strategies, combining both approaches to manage risk and potentially enhance returns. 

This involves using passive strategies for diversification and allocating a portion of the portfolio to active management. Ready-made portfolios, offered by various platforms and managers, provide this blended approach with different allocations like 80/20, 60/40, or 50/50. 

This popular route offers further diversification and lower charges compared to solely active funds.

The choice of approach depends on your overall objective for your son and your tolerance for accepting risk. 

Regardless of your decision, it’s crucial to recognise that investments can both increase and decrease in value, and there’s a possibility of receiving less than your initial investment. 

However, you do also need to bear in mind that you are looking at the long term so you might feel able to take a more risk.

George Tuck, independent financial adviser at Flying Colours, replies: As parents in the UK, ensuring a bright and secure future for our children is paramount. 

However, with the soaring costs of housing, education, and living expenses, safeguarding their financial well-being has become more challenging than ever.

One of the primary motivations for investing for children in the UK is the skyrocketing property prices. 

By investing early on behalf of their children, parents can accumulate funds to help them navigate the daunting prospect of purchasing their first home.

Similarly, the cost of higher education in the UK continues to rise, placing a significant financial strain on families. 

Investing for children can therefore provide the financial resources necessary to pursue educational opportunities without being burdened by excessive student loan debt.

By starting to invest for your child as soon as they’re born, they’ll be benefiting the most from the effects of compounding. 

This essentially means that by reinvesting the money the investment makes, it will generate earnings on both the original investment and on the returns it made previously.

So, for example, if a £600 annual investment grows by 5 per cent every year, by the time your child is 18, the investment would be worth £16,279 from an original investment of £10,800. 

So, 5 per cent growth has become 50.7 per cent. Of course, no-one can guarantee the level of performance, but that would not be a bad nest egg to have if this level of growth was achieved!

When it comes to investing for children in the UK, there are several options available, each with its own set of advantages and disadvantages. 

One popular choice is a Jisa, which allows parents to invest on behalf of their children in a tax-efficient manner. Jisas offer a range of investment options, including stocks, bonds and cash. 

The funds are locked away until the child reaches 18, at which point they gain full control of the account. Currently, you can save up to £9,000 a year into a Jisa.

The benefit of setting up a Jisa in your child’s name, instead of yours is that it frees up your tax-free allowance to invest up to £20,000 per year into your own ISA. 

You might not have that much to invest right now, but things could change in the future.

When deciding on the most appropriate investment strategy, it’s essential that you take care to manage the level of investment risk being taken. 

Taking excessive risk could lead to unwanted levels of volatility, whereas not taking enough risk may mean you fall short of your growth objectives.

One way to manage risk is by diversifying the investment strategy, effectively spreading investments across different assets, and reducing the dependency on any one particular investment opportunity. 

For example, investing solely in the S&P 500 would not offer a great deal of diversification, given that 35 per cent of the index is made up of just ten companies. 

Getting the right advice should help to avoid making costly mistakes when it comes to formulating a suitable investment strategy.

In conclusion, investing for children in the UK is an important aspect of responsible financial planning, offering parents the opportunity to secure their children’s future in an increasingly uncertain world. 

By exploring different investment options and considering the impact of compounding and inflation, parents can take proactive steps to build a solid financial foundation for their children and empower them to achieve their aspirations.