Want to invest for your kids? Here’s how to get started

Want to invest for your children, but don’t know where to start? This article looks at the investment accounts out there to help you on your way.

Junior ISA

You might already have an ISA of your own, but there are junior versions too. They come in two types – cash, or stock and shares. As we’re talking about all things investment rather than cash, let’s focus on the latter.

A Junior ISA is available for under 18s, and must be opened and managed by the child’s parent or guardian. We often get grandparents asking if they can do this job, but that’s only possible if they have parental responsibility for the child. That said, money paid into a Junior ISA is treated as a gift, so can come from anyone.

The Junior ISA allowance is a generous £9,000 per tax year, per child. As with all ISAs, the investments grow free of taxes. The difference with Junior ISAs is that the account (and money in it) can’t be accessed until the child reaches age 18.

If you can save a small amount regularly into a Junior ISA, it can really build up a nest egg over time. Assuming your investments grow by 4% a year after charges, investing £100 per month from birth would leave your child with a pot worth £31,000 by age 18.

When your child turns 18, the account becomes an adult ISA and they’ll have full control on what happens to it. They can continue to save and invest themselves, or they could spend it on whatever they choose.

This possibility can put some parents off. Obviously, you want to hope your child will be a financially responsible person at the age of 18, but there’s also a risk they could splurge it all.

What about using my own ISA instead?

This might appeal if you want to retain a bit of control over how and when your child gets their hands on the money. Paying into your own ISA means the money still belongs to you, although it does mean giving up some of your own allowance each year. You get a generous £20,000 allowance each year per person for your ISA – so if you know you won’t be maxing that out for your own purposes, you could consider using some of it for your child.

Some people find that a combination of a Junior ISA and their own ISA works them. For example, cash gifts from grandparents can go into the Junior ISA, with money you want to put aside yourself going into your own ISA, if you have spare allowance available.

There’s no right answer, but getting cash invested and making the most of ISA tax breaks and the potential for compound investment returns is likely to have the biggest impact on the value of the end pot, rather than which ISA you use.

Junior SIPP

Retirement and children don’t sound that compatible at first. But if you’re really in it for the long haul, you’ve junior pension options too, one of which is a Junior SIPP.

To set up and manage a Junior SIPP, you must be the child’s parent or guardian – but anyone can pay money into it. Money inside the SIPP can also grow tax-free.

Assume they’re not earning their own money, contributions for children are limited to £2,880 a year. But the tax relief top up from the government would make this £3,600 in total.

At age 18, the child’s Junior SIPP converts to an adult SIPP. But their money will be tied up until they reach the minimum retirement age. This will be 57 from 2028 onwards, and it’s likely to be even higher for the children of today.

When your child does come to withdraw the money, current rules mean they can take up to 25% from their pension tax-free at retirement, with any additional withdrawals taxed as income.

Investment accounts held in trust

Another option is an investment account held in trust for a child. Here’s how it works.

Money is gifted to a simple (bare) trust and managed by adult trustees until your child reaches 18. The person making the gift (called a donor) can choose the trustees and have a degree of control over what happens to the money in the meantime.

Trust investment accounts are popular with grandparents because they can be opened and managed by anyone, unlike a Junior ISA and SIPP.

Although the investments legally belong to the child, and they can access them when they turn 18, money in the account can be accessed earlier than this, as long as it’s used for the benefit of the child.

Although there’s no limit on the amount you can invest, keep in mind that dealing accounts don’t enjoy the same tax perks as pensions and ISAs. That said, any investment gains or income are usually tested against the child’s own personal tax allowances. So these accounts can still provide some tax efficiency, as well as allowing greater access for grandparents and other family members.

Trust investment accounts aren’t generally used by parents to make larger gifts, because if the income generated by a parental gift exceeds £100 a year, the income is treated as being the parent’s own for tax. This rule only apples to gifts from parents, not other family members.