How can I build up £100,000 for each of my three children?

Ian is age 45, and his children are 13, 11 and seven. He has recently received cash worth £200,000 from an insurance policy payout and would like to use it to help him give each of his three children £100,000, in today’s money, when they reach age 25.

“I wish to use this policy payment to give my children strong financial support as they enter adulthood, maybe to use as deposits to buy houses, start businesses or pursue other opportunities,” says Ian. “I wondered how should I invest the money to achieve this and what vehicles I should hold it within?

“Each child already has a junior individual savings account (Jisa) so should I invest the new money in these and other accounts in their names, or keep it in accounts in my name?

"I was thinking of putting £50,000 of the new money into NS&I Premium Bonds which would leave £150,000 to invest. I had also thought of putting down a large deposit on a buy-to-let property. But the tax breaks relating to this have disappeared and second homes may be a target as the government looks at new ways to raise tax revenues.

"I have been investing for 25 years and personally manage my self-invested personal pension (Sipp), so have a high risk tolerance. Within this, I mainly purchase direct share holdings, as well as some investment trusts and exchange traded funds (ETFs).

"Although the timescale for my children's money is quite long, so far I have taken more of a medium risk approach when selecting funds for them. My goal is to grow the monies by 50 per cent between now and when they turn 25, keeping ahead of inflation, but I appreciate that there will be market falls along the way.

"I want their investments to be diversified as far as possible even if taking less risk results in lower returns. Most returns over a longer time frame come from reinvesting income and compounding.

"I am mindful of fund fees and the prices of investments. So, for example, I added BlackRock Energy and Resources Income Trust (BERI) when it was trading at a discount to net asset value (NAV) of about 15 per cent. And in March last year I added F&C Investment Trust (FCIT) to my two eldest children’s Jisas when it fell to a discount approaching 20 per cent.

"I am happy to sit on high cash levels for some time but, as nobody can time the market correctly, is drip feeding money in over time a better option?

"I don’t often sell positions as I have more of a buy and hold strategy. But if a holding is exceptionally successful, say has doubled, I may sell some or all of it and reinvest the proceeds. For example, I recently sold Schroder Asian Income Maximiser Fund (GB00BDD29D99) after it had appreciated 20 per cent out of my youngest child’s Jisa. I reinvested the proceeds in Xtrackers MSCI World Value UCITS ETF (XDEV).

"I try to pick up on interesting themes that I think will run for a time. For example, with money being printed on a large scale by central banks inflation is a risk. So resources, such as metals, and maybe property could be a hedge against this. I think that bonds – even inflation-linked ones – aren’t a suitable investment to protect against inflation.

"And I have recently added BlackRock Asia Special Situations (GB00BJGZZ065) to my oldest two children’s Jisas as I feel that China is a market that cannot be ignored over the longer term."

NONE OF THE COMMENTARY BELOW SHOULD BE REGARDED AS ADVICE. IT IS GENERAL INFORMATION BASED ON A SNAPSHOT OF THESE INVESTORS' CIRCUMSTANCES.

Chris Dillow, Investors' Chronicle's economist, says:

You’re thinking of putting down a big deposit on a buy-to-let property, but I would think very carefully before doing this. Property is less tax-advantaged than Junior Isas and I fear that it carries interest rate risk.

This is because the price of any asset should be the present value of the future benefits of ownership. In the case of property, these benefits are rental income if you’re a landlord or rent saved if you’re an owner-occupier. The main reason why property has done so well in recent years is because interest rates have trended down, reducing the discount rate applied to its future benefits and raising its price. But if interest rates rise this process will go into reverse – future rents will be discounted more heavily so prices will fall.

You are aware of the reason why interest rates might rise – inflation. Central banks won’t raise interest rates as soon as inflation picks up and, while they hold back, we might see good times for property. When rates do rise, though, things will become more testing.

What’s true of property is also true of metals. One risk is that higher interest rates will cause investors to worry about the next economic slowdown and this will be detrimental to cyclical metals. Also, higher returns on cash would make precious metals such as gold look less attractive, because these do not pay interest, and depress their prices.

I agree that index-linked bonds aren’t necessarily protection against inflation. This is because if higher inflation causes interest rates to rise bonds' real yields will also rise and they will make capital losses. But the same logic applies to property, metals and even equities which are only safe from inflation if rates don’t rise. And that’s a dangerous bet to take.

You say that nobody can time the market. This is wrong. History tells us that the dividend yield is a superb predictor of the FTSE All-Share index's medium-term returns. And the strategy of selling when prices are below their 10-month average also helps with this. There’s perhaps more evidence that it is possible to time the market than of investors' ability to pick the right stocks.

I mention this because of your children's long-term investment horizons of between 12 and 18 years. There are two things a long-term investor can do. You can either buy a global tracker fund and hope that the long-term equity premium still holds. Or you can invest for a series of short terms, but this requires exit strategies. 10-month averages and dividend yields can help to provide these.

During the past 18 years, there have been three very different crises – the 2008 financial crisis, the eurozone crisis and Covid-19. And secular stagnation and negative real interest rates have emerged. So why won’t the next 18 years produce similar big changes?

One of investors’ most costly errors is recency bias – our tendency to assume that current trends will continue over the long term. But they won’t. Unless you are going to just buy and hold, you’ll need to change tack many times. And that means having to time the market.

Darius McDermott, managing director at Chelsea Financial Services, says:

You have a good approach to investing. You are aware of the potential rewards and risks, and knowledgeable about how external factors can influence returns.

Your goal of building up a sum of a £100,000 in purchasing power for each of your three children is eminently achievable with the sum of money you have to invest, possibly with a decent amount left over for something else. Assuming a real return of 4 per cent (6 per cent after fees and allowing 2 per cent for inflation), I estimate that the amounts needed to achieve the £100,000 goals are £54,000 for the 13 year old, £51,000 for the 11 year old and £49,000 for the seven year old.

Returns each year won’t be this uniform in reality. Rather, they will be higher and lower, and in some years negative, but this illustrates that your targeted amount is achievable with some money to spare. So if you keep an eye on things you could top up the accounts, if necessary, as the children approach age 25.

You suggest drip feeding the money into the market, but with time on your side I’d be tempted to invest lump sums. Jisas currently have a £9,000 annual contribution limit, so you could invest this amount in each one and hold the remaining money in a segregated account in your name. You could then transfer £9,000 (or whatever that tax year's annual limit is) into each child's Jisa every year. This would mean that all the money is working hard from day one.

As you have been running your Sipp successfully, the temptation is to do the same for your children's portfolios, but it could take a lot of time and effort. If you do not have the necessary time, consider holding a good multi-asset fund as the core of each portfolio.

Options include Rathbone Strategic Growth Portfolio (GB00B86QF242) run by David Coombs which has a relatively low ongoing charge of 0.62 per cent, and invests in stocks, funds and investment trusts. Coombs moves the asset allocation around to try and get the best return possible in the prevailing environment and the fund can access investments that private investors can’t directly. I think it’s great value for money.

You could then manage some smaller allocations to 'satellite investments' alongside this for each child, investing in the themes you like and buying some great investment trusts at discounts when the opportunity arises.  

It is true that bonds aren't great in an inflationary scenario and real assets hold their value better. But the jury is out on whether inflation is a short- or long-term theme at the moment – there are so many arguments both for and against. As you are a buy and hold investor, I’d suggest steering clear of this theme for now and maybe concentrating more on longer term secular themes. Examples include emerging markets consumers, emerging markets healthcare and the transition to cleaner energy.

I wouldn’t put £50,000 into NS&I Premium Bonds. They are currently paying the lowest rate ever and we’ve seen a big exodus away from them as investors search for better returns. If you want to hold some money in cash, shop around for a better rate to limit interest rate and inflation risk. You will probably be able to get a better rate with a two- to three-year bond.