Friday, 20 April 2018

Investing for the Grandchildren


Many parents and grandparents like the idea of saving for children/grandchildren. A couple of years back I earmarked an investment into the Vanguard Lifestrategy 80 fund for (then) three grandchildren. 

However since then the number has grown to five and as I will soon become a pensioner, I have been considering siphoning off some of the state pension via a monthly drip-feed into a long term savings plan via one of the global investment trusts. 

I have been doing a little research in recent months looking at the various options. The traditional options include Aberdeen who recently merged with Standard Life and offer a plan with a min. £30/month regular and £150 lump sum however, their flagship option of Murray International has not been performing so well in recent years and therefore I decided to pass. There is also F&C with a min. £25/month but £250 initial lump sum and then the annual charge of £30 and also dealing fees which would not work for me. I also looked at Baillie Gifford which runs my Scottish Mortgage holding.

The 5 grandchildren aged between 9 months and 6 yrs and I want to put aside a regular monthly amount with the option of adding the odd lump sum amount from time to time. I am fairly traditional 'old school' when it comes to money and remember what I was like at the age of 17 or 18 yrs and what I may well have done with a large sum of money at a young age. I therefore want some control over the account as I would like them to have the money a little later, maybe at the age of 21 yrs (earliest) rather than 16 or 18. This rules out a few options such as junior ISAs and bare trusts set up in the children's own name.

In the end I decided to open a children's savings plan with Baillie Gifford as I believe the Scottish Mortgage trust probably offers the best long term growth prospects combined with the lowest costs.

The plan is in my name with the grandchildren all named as designated beneficiaries. The plan offers a low cost way of saving via a range of investment trusts.

There are 4 global trusts :

Scottish Mortgage
Monks
Scottish American
Edinburgh Worldwide

and 3 trusts which focus on the Far East:

Baillie Gifford Japan
Baillie Gifford Shin Nippon
Pacific Horizon

Flexible

The plan will run for the next 20 years or so and over this time-frame I am obviously looking at global growth.

Although I am starting with the one investment trust, I do have the option to split my monthly contributions between two or more trusts. The minimum is £25 for each trust and there is the option for a lump sum addition into any trust - min £100.



The Trust Choice

To start off I have selected the Scottish Mortgage trust as this is the largest global trust with the lowest ongoing charges. I am obviously familiar with SMT as I hold it in my own SIPP and ISA. 

The managers have a good reputation for consistent performance in areas which I believe will provide a good chance of out-performance over the coming years. It has turned £1,000 into £4,350 over the past 10 years which equates to an average of over 15% per year. At this rate, an annual contribution of £1,000 over 20 years would grow to just over £100,000. If it can deliver anything near this over the coming 15 to 20 years my grandchildren will have a tidy sum in the region of £20,000 each - fingers crossed.


Charges

For the best long-term returns, it is important to ensure the costs of the investment are low. This is one of the reasons the low cost index funds generally out perform the more expensive managed funds. The big advantage of the savings plan is there are no platform charges from Baillie Gifford and also no transaction charges for the purchase of shares which is important when a monthly drip-feed plan is operating. 

Therefore the only charges will be the ongoing charges for the Scottish Mortgage trust of 0.44%. This puts it on a par with the likes of holding Vanguard Lifestrategy with ongoing charges of 0.22% combined with platform charges of 0.15% (Vanguard Investor) or 0.25% (AJ Bell Youinvest).

There is however a charge of £22 for each withdrawal but as I am not planning on this for many years it should not be a problem.



For anyone interested in exploring the investment options in more detail here is a link to their savings plan (pdf).

Feel free to comment if you are currently saving for children or grandchildren and share your experience with others.

20 comments:

  1. Hello DIYInvestorUK. This product is very interesting since one doesn't incur charges while buying the shares. Is this kind of a product available outside of children kind of plans? Or outside of Baillie Gifford? Thanks!

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    1. You would need to check the situation but I think there would be no dealing charges with the Share Plan & ISA but there would be an annual charge of £39 which is equivalent to a platform fee charged by the low cost brokers.

      I am not aware of a broker/platform where you can buy investment trusts without a dealing charge. With most the regular fee is £1.50 or £2.00 per monthly transaction.

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  2. I think it's a wonderful idea John. I intend to do the same for my kids (although the key ingredients yet to be mixed). Waiting until they're 21 or older seems to be a wise choice.

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    1. Thanks WF30 and good luck with your mixing!

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  3. John, great blog post (yet again).

    Every year during the 1990's I took out a 5 yr Met Police Freindly Society Police Savings Plan
    at £25 per month, to coincide with them maturing in the month prior to Christmas.
    Initially, they were a great idea, as the payments came straight from my pay.

    However I became very disillusioned with the poor returns, and so I began to take out
    at the exact same month every year a regular Inv. Trust Savings Plan with Baillie Gifford
    for £25 to see if the returns over 5 years would be any better.
    So Year 1 I invested £25 per month into Monks I. T. (MNKS),
    Year 2 it was Baillie Gifford Japan (BGFD)
    Year 3 - Scottish American I. T. (SCAM)
    Year 4 - Scottish Mortgage (SMT)
    Year 5 - B G Shin Nippon ( BGS)
    I would rigidly stick to the 5 year plan, by cancelling the first one after 5 years, but then continue
    to take out another regular savings plan, again for 5 years, so in effect I had an amount of extra
    cash available to me every Christmas.
    Since about 2007 I no longer cash in the savings plans, and so still have 5 Baillie Gifford plans
    currently running.
    Needless to say in all cases the savings plan produced better returns than than the friendly society
    plans, and I eventually ditched those in favour of Inv Trusts.

    Then a few years after our son was born, my wife and I decided to use his monthly child benefit
    and invest it into the Aberdeen 'Investment Trust Plan for Children'.
    Split 4 ways it was divided equally into Aberdeen Asian (AAIF), Dunedin Income Growth (DIG),
    Murray Income (MUT) and Murray International (MYI).
    He is now 18, and in 1st Year at Uni. He is now responsible for this pot of cash, and continues to
    pay £25 per month into each of the 4 Inv Trusts. He has no intention of cashing them in, and has
    formed a keen interest in checking out the Yearly and Half Yearly reports to see the Trusts top holdings.

    So overall I think these have been a great product, and certainly outperformed leaving the cash
    in a savings account etc. and you a right to bring this to the attention of your blog.

    Thanks
    Matt McKiernan

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    1. Matt,
      Thanks for posting your experience of using these plans and the benefits they have provided compared to cash savings or your Police Friendly Soc. plan which I guess would have higher charges.

      It is also interesting to see how your son has taken an interest in the savings plan/investments at an early age and I imagine this will serve him well in later years.

      I am thinking the plans you have left untouched since 2007 must have accumulated rapidly judging by the 10 yr returns for Scottish Mortgage.

      Again, thanks for sharing.

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  4. This is very interesting Diy Investor and something I (previously) knew nothing about! Thank you for sharing your plans for your grandchildren. Would you indulge me with answering a few (tax) questions? You mention bare trusts, with this plan is it not in the Child's name and therefore part of your estate? Depending on your answer to that question, is that why you're putting a lump sum of £250 to start? I presume if it's counted as gifting to your grandchildren then the regular payment system is a handy way of utilising gifts out of income.

    Thanks again!

    YFG

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    1. Just to clarify YFG, the savings plan can be set up as a designated account or a bare trust. I have set up a designated account which means it is in my name and therefore I remain in control. With the bare trust option, the grandchildren would have the legal right to access the fund at age 18 which is one of the reasons I did not select it.

      A bare trust can be a way to mitigate against IHT liability down the line but I do not think this will come into play for me. I think it is more of an issue for those with expensive properties in London and the South East.

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    2. Thanks for clarifying! I skimmed the booklet you linked to. I can see both options are available and have their pros and cons. Thanks again for sharing.

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  5. Hi, thanks for this. We have just had children and my parents are asking around as to how they can give my kids a present. I have told them to invest the money in their name. They would prefer something that is a lump sum, rather than a monthly investment. It seems what you are suggesting here is more of a monthly investment option.

    Any ideas for lump sum using the bare trust arrangement?

    My parents are condering buying Premium Bonds, but I don't think its great for long term returns.

    ReplyDelete
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    1. I started my plan with a lump sum and will now continue with the monthly drip feed and occasional lump sum top-up. If your parents wish to make a one-off lump sum investment that's fine...the plan is very flexible.

      The bare trust option is worth consideration depending upon their circumstances but they would need to read the details and work out what would be best for them I think.

      I hope they can work something out and good luck with it.

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    2. Thanks for responding. Will speak to my folks, esp between designated account and bare trust.

      To add additional complications to the mix me (and the kids) are not based in the UK (although they hold UK passports), so that is something else we need to consider. My folks are in the UK and would like to have something that is easy for them to put into in GBP.

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    3. I think it should not be a problem setting up a designated account in your parents name for the grandchildren but it could be more complicated setting up a bare trust in their name if they are not UK resident. Maybe your parents could give BG a call to clarify the situation?

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  6. I started a monthly savings plan for my two nieces. One of the IT's I selected was SMIT. When they were 13/14 I then switched contributions away from S & S into cash accounts / cash JISA's. The idea being that they would have an accessible sum of money, without needing to liquidate the investments as teenagers.
    The 19 year old now has some £44k - rather more than intended! (the IT's have performed rather better than I expected). So, rather sneakily, I am rationing disclosure of the entire windfall - another tranche will come her way after uni!
    So I shifted contributions into a SIPP (SMIT, F & C Global small cos, Fidelity Special Values, & Vanguard LS 80%) which has also performed well over the years. The intention being that this will benefit them in their 30/40's as they will not need to make large pension contributions to secure a reasonable retirement.

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    1. Alice,

      Well done with your choice of investment savings. Looks like a v. good return over just 5 yrs and a good start for your nieces.

      Also that's an interesting strategy for their pension which I have not come across before...presumably the SIPPs are in their names and you make the contributions?

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    2. Yes, that's right.
      And,of course, my £240 monthly SIPP contribution attracts £60 from HMRC.
      One reason for the SIPP was that I thought the proceeds from the savings plan were more than adequate. It also helps for IHT planning (being regular payments out of income).
      Another tactic would be to have a SIPP in your name but with grandchildren as the beneficiaries (also useful for IHT planning). That way the fund is still available to you if necessary.

      It's rather more than 5 years for the savings plan, as I started soon after they were born. Hence the large sum for my 19th year old niece - I wasn't anticipating the markets conditions of the last 10 years (or the stellar performance of SMT - when I first started investing I seem to remember it wasn't greatly differentiated from the other global IT,s).

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    3. Yes, I can appreciate how the IHT aspect makes this option appealing. Thanks for clarifying the length of savings which I misread first time around.

      James Anderson has been at the helm of SMT since 2000 but it is only since the market turmoil of 2008 that the trust has taken off with the average of 15% p.a. I suspect it may be a challenge to keep this return going for the coming decade but that is what I am hoping for!

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    4. Pensions are a lovely idea for children, where people can afford it but perhaps a more 'nearer-term' option would be to consider a LISA for the child(ren). This can be used towards a house purchase or retirement planning (accessible at 60), and receives the same 25% government uplift as you get in tax relief for the pension.

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  7. Thanks for this interesting post, DIY.

    I've got amounts invested in various index trackers for my nieces and nephews, to give them each a small sum when they turn 21 - instead of buying them big birthday presents, I put a little aside in investments each year. As the amounts are only small, they're all within one of my S&S ISAs. Time to invest, depending on their ages range from 10 - 18 years.

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    1. Cheers weenie.

      I did think about just saving in my S&S ISA as you do but the actual costs of the savings plan actually worked out less with the absence of dealing fees and platform charges. The other aspect I was thinking was showing them the annual statements when they are a bit older and maybe engaging them in conversations about money if they show any interest.

      Interesting that you also have 21 yrs of age to pass on the money.

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