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Investing for children

Keen to set your child off to a good financial start in life? We explain your investment options.

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By

Ceri Stanaway

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Let’s face it. When you’re a new parent, dealing with sleepless nights, a bottomless dirty laundry pile, and the flummoxing cost of nappies, child car seats, buggies, baby clothes and myriad other things that babies need, investing for your child may not be top of your priorities. But, when you can find a spare moment, it could be one to add to the list. Here’s why, and what you need to know.

What is investing for children?

Investing for children is pretty much what it says on the tin. It’s putting money into an investment account (rather than a cash savings account) to built assets for a child’s future.

Can I invest on my child’s behalf?

Yes. In fact, if you want your child to take advantage of the potentially higher returns of investing over cash savings, you will have to do it on their behalf. That’s because it’s not possible to hold most shares or other investments in your own name until you turn 18. One of the few exceptions is Premium Bonds, which you can buy and own from the age of 16.

What are the key reasons for investing for my children?

You’ve probably read (maybe even on the Finder website), that the earlier you start investing the better the chances your money has to grow and meet your investment goals. So it stands to reason that starting out investing in childhood gives the best possible chances of this.

While no investing is risk-free, no matter how early you start, investing as early as possible can give your children a good start in life, and the potential to build up a decent lump sum by the time they reach adulthood. This could be used to help pay for university or a deposit on a first home, for example.

Where can I invest for my children?

If you want to invest for your children’s future, you have three main options:

Junior stocks and shares ISAs

Junior ISAS, also known as JISAs, can be opened for any child under 18. They have to be opened and managed by a parent or guardian, but other relatives or friends can also pay in. There are two main types of JISA: junior cash ISAs and junior stocks and shares ISAs.

Junior stocks and shares ISAs typically offer much the same choice of investments as adult stocks and shares ISAs, depending on the investment platform you use. The annual allowances are slightly different though. As of the 2023-24 tax year, adults can save up to £20,000 a year into ISAs, split as they choose across cash ISAs, stocks and shares ISAs, lifetime ISAs, and innovative finance ISAs. For children, you can save up to £9,000 a year split across the two types available.

Although the parent or guardian holds and manages a junior stocks and shares ISA on their child’s behalf, the money in it belongs to the child. They can’t withdraw the money until they turn 18, though they can take control of managing the account from the age of 16.

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Junior SIPPs

A junior SIPP (self-invested personal pension) is a private, defined contribution pension scheme taken out for a child by a parent or guardian. This type of investing involves thinking properly long-term, as it means you’re planning for your child’s retirement from year dot. Well, they do say it’s never to early to start planning for later life!

With a junior SIPP, the parent or legal guardian decides on what to invest in, how, and when on behalf of their child until they turn 18.

The maximum annual deposit a parent or guardian can make is £2,880 per year. This benefits from basic-rate (20%) tax relief. This is substantially lower than adult SIPPs, where there’s technically no limit on how much you can contribute (though only a maximum of £60,000, or the equivalent of your annual earnings, benefits from tax relief).

When the child turns 18, ownership of a junior SIPP passes to them, and they’ll take on responsibility for managing the pension. As with any pension fund, they usually won’t be able to access the money until they turn 55 (or 57 from 2028).

Premium bonds

Anyone can buy premium bonds for a child under 16 (with the approval of their parent or guardian). Each child can hold up to £50,000 worth of bonds.

While they’re technically classified as investments, premium bonds work differently from what most people think of as investing. Premium bonds give holders the chance of winning prizes each month, ranging from £25 to £1 million.

Unlike most investments, which can’t be held by under 18s, premium bonds can be transferred into a child’s name from the age of 16.

As they’re backed by HM Treasury, all the capital you invest is 100% secure in premium bonds. This, of course, needs to be weighed up against the chances that you won’t win anything at all and could lose money in real terms. According to the government’s MoneyHelper website, “on average, one in three people win a prize each year with a £1,000 investment.”

When can I invest for my children?

The only age requirement for Junior stocks and shares ISAs and junior SIPPs is that they must be opened in the name of a child that is under 18. So there’s nothing stopping you opening one or both from the moment your little bun emerges from the proverbial oven. Though, admittedly, you may have other things on your mind at the time.

With premium bonds, the upper age limit is slightly lower, at 16. From this age, a child is free to open their own premium bonds account or take over one you’ve opened for them.

What providers offer children’s investment accounts?

HM Treasury-backed National Savings and Investments (NS&I) provides premium bonds.

Junior stocks and shares ISAs and junior SIPPs are available from a number of the same providers that offer adult versions of the same. Fewer fewer providers tend to offer the junior variants, though.

What are the advantages of investing for children?

At a very top level, investing holds the same potential advantages for children as they do for anyone else. Namely, the potential for higher returns than are on offer from cash savings.

In periods of high inflation, the interest rates on cash savings tend to struggle to match, let alone beat, inflation. This means that your cash won’t be able to keep up, and will lose value in real terms.

In this kind of environment in particular, investing gives your money at least a fighting chance of beating inflation. There are no guarantees, as all investing is inherently risky. But what we do know is that the longer you keep your money invested, the better the chance is that it will ride out any short-term volatility and give you decent returns. And starting out investing while your child is a baby or toddler gives their investment the best part of two decades to grow, even assuming they access it the moment they turn 18.

What are the risks of investing for children?

Just as the advantages of investing for children are similar to what they are for adults, so too are the risks. The key risk being that the investments you make on behalf of your child won’t do as well as hoped. They may even lose money. These risks are mitigated by keeping the money invested for a longer period, but not completely nullified. They can also be managed by ensuring you build a balanced portfolio for your child that avoids putting all your eggs in one basket.

With both junior stocks and shares ISAs and junior SIPPs, the money will be locked up until your child turns at least 18, and much longer in the case of junior SIPPs, which your child won’t be able to access until they approach retirement age. While in many ways this is a good thing, it does mean that – should the money be unexpectedly needed earlier in life – this could cause issues. So you should only tie up money in these investments for your child if you’re certain you can afford to lock it up for the long term. Otherwise, consider alternatives.

A cash savings account is one option. Another is Premium Bonds. While technically still an investment, Premium Bonds can be bought and sold by the child’s parent or legal guardian at any point. The key risk with Premium Bonds, of course, is that any profits are entirely reliant on winning Premium Bond prizes. If you don’t win, you’ll lose money in real terms.

Which is the best investment for a child?

There’s no such thing as the “best” investment. It all depends on what goals you’re investing for. If you’re investing for goals in early adulthood, such as university fees or a first property, then a junior stocks and shares ISA or possibly Premium Bonds could be a good bet. If you’re thinking really long term, consider a junior SIPP, which will help set up your child for a comfortable retirement while their investments have the maximum time to grow.

Should I save or invest for my children?

Good question. The best option depends on what you’re trying to achieve.

  • Cash savings tend to be better for shorter term goals (paying for school fees, for example, or where you’re not confident that you can leave the money locked up until your child reaches at least 18). Just be aware that, in times of high inflation and relatively low interest rates, money held in a children’s savings account is likely to lose money in real terms. You can maximise the interest you earn by opting for fixed-rate rather than instant access accounts. And make the most of ISA allowances to minimise the tax you pay. Though bear in mind that your child’s annual junior ISA allowance will need to be split between cash and stocks and shares ISAs.
  • Investing in the stock market tends to produce better returns than cash over time. So if you’re investing for your child’s longer-term future (university, or even retirement, for example), then this may be a good shout. (Though of course, in case you hadn’t already got the message, it’s not risk-free, even over longer term periods). As with cash ISAs, making use of your child’s tax-efficient junior stocks and shares ISA allowance will help to maximise returns.

The good news is that you don’t have to pick one option or the other. There’s nothing stopping you splitting your contributions across savings and investments as you wish.

Case study: investing vs saving

Unless you have a crystal ball, it’s impossible to know for certain whether saving or investing will reap better long-term rewards. Nobody knows what the future of the economy will hold or how global events could shape stock market performance. While investing tends to outperform cash savings over time, a long period of downturn could see investments do badly.

There are plenty of calculators out there that estimate likely returns from cash savings vs investing, and we’ve used one of them (from Santander) to calculate how much you could earn by putting £9,000 a year into a cash ISA vs a stocks and shares ISA for your child, every year from their birth to when they turn 18. Santander assumes a steady instant access cash ISA interest rate of 3.2%. It’s also given a “realistic”, “potential high”, and “potential low” set of returns for investing the same amount into a stocks and shares ISA. Here’s what it reckons your child could have in their account after 18 years.

Is investing for my children worth it?

Danny Butler

Finder insurance expert Danny Butler answers

As with any big financial decision, it will depend on your personal circumstances and goals. For example, if you have expensive debts, it’s generally accepted that it’s better to pay these off before building up anything other than an emergency savings fund – for yourself or your kids.

However, if you want to set your children off to a good start in life, whether that’s to put them through university, help them get on the property ladder, or simply to give them a nest egg to use for their own future goals, it’s also generally accepted that starting earlier is better. The sooner you start investing for your child, the greater the chance your contributions will have to grow. And the bigger that nest egg could end up being.

In short, it’s a decision only you can make, but we reckon it’s well worth considering. And, as always, if in doubt it could be worth speaking to a professional financial adviser. They’ll inevitably charge a fee, but could also help you make judgement calls that will reap better rewards in the long-term.

Pros and cons of investing for children

Pros

  • Investing tends to yield better returns than cash savings in the long term
  • Starting out early maximises the time your child’s nest egg has to grow and help them meet future goals

Cons

  • As with any type of investing, children’s investments come with risk attached
  • The money will often be tied up and inaccessible until your child turns 18, or much later if you opt for a junior SIPP

Bottom line

There are several types of account aimed at investing for children children, including junior stocks and shares ISAs and junior SIPPs. Only a parent or guardian can open these accounts, but anyone can pay in on behalf of the child (up to a maximum annual limit). Over the long term, investing can net higher returns than putting the equivalent amount into cash savings. So it’s well worth looking into if you want to provide for your child’s financial future.

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