Moral Money: our reader wants to know how he can invest fairly for the next generation
Dear Moral Money,
My son was born during lockdown and, being the prudent investment banking accountant I am, I decided that I would save £1,000 every year, for my son and any future children, in their own accounts, so that they would have a lump sum when they were adults.
Obviously, the largest potential investment upside would seem a Junior Isa, but my concern has been that the gains of one child might outpace that of another’s – especially over an 18 to 21 year period – to the extent that I cannot easily cover the shortfalls to ensure each child received an even amount of cash to assist them with adulthood.
My worry is that I am wasting the capital potential of these savings (hypothetical as they are right now) – but, being the eldest sibling in my own family, I’m aware of how perceptions of unfairness can hurt siblings.
What might be the best option for me to ensure maximum savings with the least variabilities between children?
Anon
Dear reader,
What an awesome father you are. I think it is really important to start as early as possible when you are trying to create resources for the future. It is the first £1 saved/invested that makes the most.
I am so pleased you have committed to this, even though you are still working out the details. Many people I meet procrastinate to the point they never get started and then the kids end up never getting anything.
An investment Junior Isa does seem the obvious choice on the face of it, because it gives you a tax exempt environment to grow the pot in, but my experience of working with many families over the years is parents often baulk at the idea of an 18-year-old having the absolute right to access the Jisa pot once they reach 18.
Many parents would prefer to have an element of control over how their young adult, who’s often still financially dependent, and very likely financially naïve, utilises the pot they have built for them. Unfortunately, they have no legal right to intervene or influence.
The Government informs the child in the year approaching their 18th birthday that the pot is theirs and they must start making decisions and take control of it.
I know I was not ready to be in charge of a significant pot of money at 18 – I would have made regrettable choices, as I didn’t pull my financial socks up until well into my twenties.
My guess is it would have been blown on joining friends on holidays I could not otherwise afford, and squandered on fashion and fun, because impressing others, fitting in and partying were my priorities at that time.
Maybe that is exactly what you intend your kids to do with the pot? If, however, you nurture thoughts of them educating themselves, getting driving lessons or investing in some other valuable life skill, or using the money as a deposit for a home or something else in the “sensible” department, maybe you need an investment pot where you get to exercise discretion over how it is used?
You make a really important point about the length of time this pot will be in place.
Whatever method you choose, it makes sense for it to be investment-based. As you have already worked out, cash savings – even if they’re tax-free, simply cannot compete with inflation over a decade or more.
Growing any investment will be dependent on the economic backdrop during the term of the investment. It is therefore highly unlikely that exactly the same investment will deliver exactly the same outcome if they start on different dates, even if they run for the same length of time.
I suspect the only way you can ensure absolute parity in the amount each child gets is to keep all the funds you are willing to set aside for your children in one pot.
That way, you can dish it all out equally between them on a nominated future date – whenever the youngest is old enough to take responsibility for owning the asset.
Given we don’t yet know how many children you will have or what the age difference will be, the eldest might end up being a parent themselves by the time they benefit.
Alternatively, you can set up an investment as a parent, in a general investment account, that you ultimately control and nominate for the benefit of your child.
Be scrupulous about making equal contributions for each account. You are proposing £1,000 per year, per child, and maybe you should nominate a particular date to make the deposit – say their birthday – and routinely add the amount and accept that they will have different investment experiences in their individual pots because economics is cyclical.
You, however, will have paid in exactly the same amount to each child’s account.
It is also worth adding that the economic cycle will also deliver different inflation experiences – including different costs, different house purchase opportunities, different mortgage rates and deals depending on when each child reaches the age where they are interacting with these things.
You will be powerless to equalise these experiences for them also.
One thing to consider at outset is that £1,000 paid for child number one today has greater value than £1,000 paid for child number three in six years’ time.
If the average inflation rate was 5pc per year over the next six years you would need to add £1,340 to the 3rd child’s pot if you were to measure equality by the buying power of the money invested, rather than its face value.
Gosh, it is so complicated trying to be fair, isn’t it?
Thank you for pushing through these decisions and getting an early investment set up for your child.
Once you decide what fair looks like to you as a parent, be prepared to explain it to your children as they get older, because they will learn some really valuable lessons about economics, inflation, ownership rights and asset building – but most importantly they will know how important it was for you to find a way to treat them fairly in a lopsided world.