Seeking a secure income for my children's retirement

"My objective for the children's portfolios is to provide a dividend income stream that will have a present value in 50 years' time at least equivalent to today's income tax personal allowance of £11,000," he says. "I want to give them a head start in their retirement planning now with something that I can hand over in 20 to 30 years without any inheritance tax implications.

"I have also set aside cash savings of approximately £3,000 for each child, to fund university costs in 10 years' time.

"My investment approach is to buy and hold, and reinvest accumulated dividends annually into the highest-yielding share, so I am not too concerned about changes in capital value. I am more concerned about the dividend payouts of the shares I have selected being sustainable, although I am willing to make additional contributions to the portfolios in lieu of dividends that are cut.

"I have a very long investment timescale of at least 50 years. I have made two trades in each child's portfolio since the initial lump sum was invested, reinvesting accumulated dividends. These were purchasing SSE (SSE) in March 2015 and Royal Dutch Shell (RDSB) in March 2016.

"I plan to continue reinvesting accumulated dividends annually into the highest-yielding shares of the five I have selected, and I add £20 annually to cover the Sipp provider's custody charge.

"I am also interested in preference shares, such as Standard Chartered 8.25% (STAC), which pays a high-yield fixed dividend. I wonder whether these would be more suitable for my long-term objectives?

"I also wonder whether I could simplify the five holdings and replace them with one fund such as City of London Investment Trust (CTY), which has a long history of paying dividends but at a lower yield."

Adrian's children's portfolio

THE BIG PICTURE

Patrick Connolly, certified financial planner at Chase de Vere, says:

It is understandable that you want to invest to help your children. However, I would question whether you have the right approach.

Pension savings for children benefit from initial tax relief of 20 per cent on contributions up to £3,600 gross (£2,800 net) each year. If you have invested a £5,000 lump sum into your children's pensions you won't get initial tax relief on the whole amount. You may even have to make a repayment to HM Revenue & Customs if you have received tax relief on the excess sum. It is more tax-efficient to invest over two different tax years as this would allow you to benefit from tax relief on the whole amount.

By focusing on pension investments, you know your children won't be able to access this money and squander it at an early age. However, by targeting an income in 50 years' time you are guessing at their future requirements when you have no idea what they will be. It is far more likely that your children will have shorter-term needs such as meeting university costs, saving for a mortgage deposit or generally making their way in adult life, but you have given this less focus.

However, it is positive that you have put aside shorter-term savings to help your children with university costs. There is an argument for keeping this money in cash, even though current savings rates are derisory. However, you could also consider diversified equity or multi-asset investments, particularly for your youngest child who will be investing for at least 10 years.

With the costs of university and getting on the property ladder continuing to escalate, the £3,000 you have put aside for your children will only be a relative drop in the ocean. So, if you are looking to make further savings for your children, it would be more practical to do this via less restricted tax wrappers such as Junior Individual Savings Accounts (Isa), rather than tying up more money in pensions where it cannot be accessed for decades.

James Norrington, specialist writer at Investors Chronicle, says:

You are doing your children a big favour by starting investments for them when they are so young. Reinvesting dividends and taking advantage of the compounding effect could give them a great start in their retirement planning.

But £5,000 on its own, even with dividends reinvested over 50 years, is unlikely to grow into a big enough pot to pay a real income of £11,000 a year. After all, who knows what inflation will do over such a long timeframe? So your plan depends on the children picking up the baton and adding to their retirement pots in 20 or 30 years.

By choosing a Sipp you have ring-fenced the money for your children's retirement planning. An alternative approach would be a Junior Isa, which allows investment of up to £4,080 a year tax-free for each child. The children would be able to access the Junior Isa at age 18, so could use the money for a purpose other than you intended, but this may not be a bad thing if it helps with student fees or getting on the housing ladder.

A Junior Isa is certainly an investment vehicle you should consider for the money you have set aside for student costs, although using up all of your own Isa allowance first each year may be better for your family's long-term wealth.

Jason Witcombe, certified financial planner at Evolve, says:

There is sensible logic to your choices but, personally, I would do things differently.

I don't like the concept of paying into pensions for minor children. The idea of locking money away for half a century doesn't sit comfortably with me. At present, pensions can't be accessed until age 55 and one should assume that this will rise over time. However, I do appreciate that the compounding effect can be huge over that sort of timescale.

I'm also not a big fan of Junior Isas, which only tie up the money until the child reaches age 18. I generally advise clients to focus on maximising their own financial position - for example, using their own pension and Isa allowances. By maximising these they could put themselves in a strong position enabling them to help their children financially at 18, 25, 35 - or whenever the children need help.

When you pay money into children's pensions you get 20 per cent tax relief which is a useful boost. However, depending on your income position, you might be able to achieve tax relief of 40 per cent or more on pension contributions in your own name. There are even certain income brackets where you can achieve an effective tax relief rate of 60 per cent or more.

Ultimately, though, it comes down to affordability. If your own retirement planning is secure and this money is genuinely surplus, then the power of compound interest will most likely yield very positive results over a multi-decade timeframe. However, as with many financial decisions there is not always a clear right or wrong, so it often comes down to personal preference and philosophy.

HOW TO IMPROVE THE PORTFOLIO

Patrick Connolly says:

For pension investments it is best to adopt a buy-and-hold approach, but while your strategy is logical investing in just five individual shares is also high-risk, and might not be practical.

While you have confidence in the companies you have selected it is unlikely that you should retain all of them for the next 50 years. You say you want to hand over the pensions to your children in 20 to 30 years' time. However, when your children reach age 18 they will automatically take responsibility for investment decisions. You cannot be confident that your children will all want to adopt your strategy for the following 40 years.

I'm also not sure about Standard Chartered 8.25% preference shares. These have been volatile in the past, the yield is about 5.8 per cent and they are unlikely to perform as well as equities over the long term.

A better option is a diversified equity fund or investment trust as this would be a true buy-and-hold solution. Your focus should be on long-term growth and, while City of London Investment Trust could be an option, globally diversified alternatives include Witan Investment Trust (WTAN) and Rathbone Global Opportunities Fund (GB00B7FQLN12).

James Norrington says:

As you are investing over a period of decades you can be more aggressive with the portfolio allocations. It is therefore not unreasonable to be 100 per cent in equities, although the strategy of investing in just five stocks seems unnecessarily risky.

There is also a good deal of effort involved, as you will need to pay close attention to the performance of these companies. You will frequently have to check a number of things, such as how well covered the dividends are each year, and how the cash position of the companies has changed. You will also have to consider what the situation with debt covenants is, as this might affect the company's ability to grow dividend payments.

As you suggest, investing in a collective investment scheme such as City of London Investment Trust would diversify UK exposure and reduce the idiosyncratic risks of the holdings. I would look to be even more expansive in terms of equity markets, especially as you are looking for the best returns over a long timeframe. For example, including some emerging markets would give the portfolios exposure to regions expected to enjoy the strongest gross domestic product (GDP) growth over your children's Sipp investment timeframe.

Because it is so easy to invest internationally or in specific return factors, you can create a low-cost, diverse and international portfolio with just a few thousand pounds.

For your children's portfolios, I would consider splitting the asset allocation between UK, global developed and emerging markets equities. You can invest in managed funds or smart-beta exchange traded funds (ETFs) that give a cost-effective tilt towards income generation.

A simple portfolio using the IC Top 50 ETFs could include SPDR S&P UK Dividend Aristocrats UCITS ETF (UKDV), db x-trackers Stoxx Global Select Dividend 100 UCITS ETF (XGSD) and iShares Core MSCI Emerging Markets IMI UCITS ETF (EMIM).

These would be a cost-effective way to diversify the idiosyncratic risk of the UK holdings and reduce the systematic risk of only investing in the UK market.

Jason Witcombe says:

I wholeheartedly agree with your approach of trying to keep costs to a minimum as this will have a huge impact over a multi-decade investment time horizon. However, I think you can keep costs low and have a really well diversified portfolio at the same time.

I understand the arguments for investing in high-dividend shares, but having a very concentrated portfolio can be a very high-risk strategy. There are a number of low-cost tracker funds that would give you well diversified access to UK and overseas equity markets, and using these would mean that you didn't have to regularly monitor individual stocks.