I want to help my 19-year old son invest. Where do I start?
15 April 2021
Question by Jonathan
I have a lump sum of about £3k and £80 a month I would like to invest for my son, 19.
He already has a reasonable amount in an investment trust so I’m not adverse to making this a little bit riskier.
What would you suggest?
Answered by Chelsea Dennison
Thanks for your question and unfortunately there isn’t a straight-forward answer here as there are a few other things to consider.
Firstly, what are you or your son hoping these funds and his investment trust may used for? Perhaps a deposit for a house, travelling or maybe a wedding in the medium term (5-10 years) or maybe something longer term like retirement? Deciding on the time horizon, can help you decide on how risky you want to invest. The longer the time horizon, the more risk you could look to take.
Secondly, once you have an idea of what you would like to use the funds for, you can look at what level of risk you would like to take with the new money and what level of risk you are taking with the investment trust.
If the investment trust is lower risk, because it has a purpose in the short term, and this new money is something that you have no plans for then you can look at something a little riskier now. If the investment trust is high risk, but you were expecting to use this in the short-medium term, then it may be worth investing this new money in something lower risk to be used sooner and leaving the investment trust as a long term investment.
There are a wide range of investment trusts available, some less risky than others.
Given the above whether you want low, balanced or high risk investment for this new money, then you can choose an investment trust with a varied level of risk to the existing holdings, or you can take a look at using funds or shares.
Shares: Investing in shares includes choosing specific companies that you want to invest in. You can range from choosing just a few companies to hundreds of different companies but you need to have time to follow the markets and have time to dedicate to the ongoing management of which shares you hold. In addition, it is quite possible you could pick companies that fail, and your investment could be lost completely.
Funds: Funds still invest in companies, by purchasing shares, but they also take on the management of which specific companies and how many companies on your behalf. By choosing on fund, you will typically be invested in a 30-60 different companies but sometimes more. As opposed to choosing companies, you can choose an area of the market you would like to invest in (e.g. emerging markets, smaller companies) or you can choose a multi asset fund which will diversify your investments across a range of asset classes and geographies. Boring Money has some more information on how to pick the most suitable fund for your investments here: https://www.boringmoney.co.uk/learn/investing-guides/product-guides/funds/ .
Finally, Jonathan, the last thing to consider with both the investment trust and the new money you wish to invest, is where this money is held.
As your son is over 18, he can open a stocks and shares ISA, a lifetime ISA and a personal pension. Again, which of these accounts you choose to hold the Investment Trust and any future investments, would depend on the purpose for the funds, but they each have some great advantages. More information on each of these accounts can be found on the Boring Money website, however, in summary:
Stocks and Shares ISA: Interest and dividends paid by the underlying funds/investment trust will be tax free if held in an ISA and any gains will also be free of capital gains tax. Withdrawals are tax free and you can hold investment trusts and funds in a S&S ISA. They have a maximum contribution of £20,000 per annum.
Lifetime ISA: Similar to a Stocks and Shares ISA with it tax advantages, however, the maximum contribution for this account is £4,000 but you do receive a 25% government bonus on contributions. Savings in these accounts need to be used for purchasing your first home or used in retirement and if they are withdrawn for anything other than these reasons, there are penalties.
Personal Pension: Again, interest, dividends and capital gains are tax free within a personal pension, however, any withdrawals are liable to income tax. As you may know, contributions into a pension also receive tax relief.
Assuming your son is not in employment, the maximum he can contribute each tax year is £2,880, tax relief of £720 will be added at source making a total contribution of £3,600. If he is in employment, he can contribute up to the lower of his annual earnings or £40,000. One important thing to remember about pensions, is that funds in a pension are not accessible until age 55 and this age is likely to rise. Although long term time horizon, would mean taking more risk and therefore, hopefully achieving better returns.
There is quite a lot to digest here, Jonathan, but I hope that helps.
Senior Financial Planner
I studied Mathematics at The University of Manchester and achieved a 2:1 in June 2015. After graduating, I moved to Paris for a year where I was an Au Pair and attend language school to improve my French to a conversational level. When I returned home in August 2016, I worked at L&G retirements before I started my career in Financial Planning on the PN grad scheme in July 2017. I passed my Diploma in just 10 months whilst working full time and in September last year gained all the credits needed for the Advanced Diploma (not quite enough experience for Chartered but watch this space!).