There are a number of ways you can start to invest for children. Investing arguably has a greater chance of giving them more for their future than simply saving in cash over the same number of years. Part of deciding where is the best place to invest for kids, is to get really clear on WHY you want to invest for them.
What is the purpose? When do you want them to have the invested money? How long have you got to invest? How much do you want them to have at different ages.
Knowing these reasons, the time and age you want your children to benefit from their investments will help you decide which investment option might be most suitable for you and your family.
Before we cover ways to invest for children let’s briefly cover short term cash savings. Investments are always for the medium to long term but cash has a place for the short-term.
Short Term Children’s Savings
If you want your children to have access to these savings today, tomorrow or within the next few years then utilise the short term cash saving options first.
There is very little incentive for using cash to save for the long term. However that’s not the purpose of short-term savings. The purpose is to have easily accessible money that they can enjoy and involve your children in day to day money skills that prepare them for adult life.
Depending on their age, you could consider:
- Children’s Bank Account, depending on their age and accessibility
- Pre-paid debit card or children’s banking app
- Pocket Money Apps are also available.
- Premium Bonds are available for children of any age
For anything that you plan to put aside for at least 5 years here are 3 key investments you could consider for your children.
3 Investment Options for Children
The 3 ways covered here all have the option to invest. That simply means you select which of the 3 vehicles or “wrappers” you want for you child, contribute the money into it and then select which stocks, shares of funds to invest in.
Each “wrapper” has a different set of “rules” in terms of tax-efficiency, accessibility, flexibility and control but the actual investments all work in exactly the same way.
1. Junior ISA for Children
A Junior ISA is exactly the same as an adult ISA, but for children. It’s a tax-efficient individual savings account that can be saved in cash or invested in stock & shares. The only difference is the age at which it can be access and the annual allowance you can contribute.
Investing in a Children’s ISA
Junior ISA Rules
Annual Allowance: £9,000 per year (use it or lose it as it can’t be carried over)
Who can open: A Parent
Who can contribute: Anyone
When can child access: Full value on 18th birthday.
Tax-Rules: No income tax or capital gains. A Junior ISA is a tax-efficient “wrapper”
Options for adult child at age of access: All goes into their bank. They could then use some of it to open their own adult ISA or adult Lifetime ISA. The money is now theirs so this does means they can spend it all too.
A Junior ISA is a great option when investing for children as there are many providers, they are relatively straightforward and anyone can contribute. The main downside for some parents is that it all becomes the child’s on their 18th Birthday.
Child Trust Funds
For a period of time in the early 2000’s there was an option to open a Child Trust Fund with a government voucher to encourage investing. You cannot apply for a new Child Trust Fund because the scheme is now closed. You can continue to keep the one you have or alternatively transfer it over into your child’s Junior ISA.
2. Child Bare Trust (General Investment)
Basically this is a general investment account like a stocks and share ISA but without the tax efficient “wrapper” around it. So yes you will pay tax on interest and gains.
However, for its lack of tax efficiency , it does offer control to you as the adult in when it can be accessed. You or a grandparent can open a child bare trust general investment and save into it. Then because you nominate a trustee (eg you or a grandparent) it is the Trustees who can decide at what age, and how much, the child can access.
Investing in a Child Bare Trust
General Investment (Child Bare Trust) Rules
Annual Allowance: Unlimited
Who can open: A Parent or Grandparent
Who can contribute: Anyone
When can child access: Age 18 onwards but the Trustees (parents or grandparents) can potentially take care of it until the child is 25 or gift to them in advance and at different times. If the child does ask for it as 18 then it is theirs.
Tax-Rules: No protection from income or capital gains or inheritance tax. However if the grandparent opens it (rather than a parent) then the tax is based on the child’s own tax allowances rather than the adults so could potentially be more tax-efficient.
Options for adult child at age of access: Once the trustees gift to the child it is the child’s money. They can spend it or open their own adult ISA, Lifetime ISA, General investment or use toward a house purchase.
One thing to consider here is WHO opens it, if it is you as the parent then that tax can be based on your personal position. Whereas if it’s a grandparent then the tax allowances are based on your child. This may be more favourable as children have the same allowances as adults do, but a lot less income and investments to be taxed on.
If you are not sure I’d recommend financial adviser for this type of investment or really do your homework.
3. Children’s Pension
Saving for your child’s pension may sound like a very long term prospect but we know that the longer an investment exists the more likely it is to benefit from being invested and compound growth.
A pension also guarantees they will be very mature adults by the time they receive it, so can suit families where they don’t want their children to suddenly have it all at aged 18.
Children’s Pension Rules:
Annual Allowance: £3,600 – made up of £2,880 from you then you receive your 20% tax relief bringing it back up to £3,600
Who can open: A Parent (or legal Guardian)
Who can contribute: Anyone
When can child access: Age 55 based on todays rules but rising to 57 in 2024 and predicted to continue rising to be 10 years behind State Pension Age.
Tax-Rules: Not taxed on capital gains or for inheritance tax. When the pension is access at 55+ then 25% of the investment is tax free and the remaining 75% treated as income and taxed accordingly.
Options for adult child at age of access: Once old enough to take the pension it can be used to flexibly access as regular income or in lump sums, turned into a guaranteed annual income called an Annuity or, if not used before passing away, the pension can be nominated to go to someone else.
Even a few years contributing to a child’s pension can make a significant impact on their adult pension position. However, if you have your own pension and pass away before you’ve used this you can nominate anyone as the beneficiary, so effectively your children and/or partner could benefit from your own Pension. Be mindful that we each have a lifetime Allowance (currently over £1m)
So it may be worth speaking to an independent financial adviser to weigh up contributing more into your own first.
Investing for Children
If you plan to start investing for children there is a strong argument to start early.
Investments are long term and even if you stop contributing later, your initial investment will still benefit from the potential growth of your savings to date. One plus side to childhood is there is a long time to invest before children can access it.
Here’s a few things to consider when investing for children, whichever investment option you go for.
- Be consistent. It is much better to save (then invest) little and often and benefit from the rises and falls in the market. You’ll be buying investments on different days at different prices so the cost will average out over time.
- Diversify. This means spread the risk into different types of investments or choose a fund that has already done this for you. So not just one single company, but many companies doing different jobs in different areas. Diversification doesnt remove the investment risk but does reduce it.
- Costs & charges. Investments do carry costs, usually for the funds and also for the “wrapper”. Despite these costs long term investments tend to outperform cash, but compare all the costs before beginning as two options that do the same job but where one has lower charges, means more money left in the investment for the opportunity to grow.
- You can mix and match. You don’t have to just choose an ISA, General Investment or a Pension you can choose a combination.
- Values WILL fall. Investment values do fall as well as rise, this is a natural part and risk of investing and it’s why it is a long term option. Should you see the value fall, keep calm and carry on investing.
Involve your children with investing.
Rather than surprise them on their birthday, let them know about the investment. Talk about the things they could do with it and help them make plans and emotionally and practically prepare for receiving the money.
Talk about the investments, what interests them and show them the good days and the fall days. So that when they come to investing for themselves in the future, investing is a normal part of their adult life.
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