Investing for your child while they’re still young is a great way to give them a gift in the future, or to help give them a head start in life. All parents want to give their child a strong financial footing, and if you start saving from a young age you’ll be able to give their money the best possible chance of growing. This guide covers the different types of children’s investment plans to choose from, the benefits of each one, and a range of important information that you should be aware of before making a decision.
Why make investments for kids?
There are lots of reasons to make investments for children, and we’ve outlined a few of these below:
- You’re able to gift them a cash sum on their 18th birthday to help towards any costs life may bring including university, a house deposit, getting married or their first car.
- By investing over the long-term there is more potential for growth than in a cash savings account. Although this is not guaranteed.
- It could reduce the amount of inheritance tax that the child may need to pay in the future.
- To teach your children the importance of saving money from an early age.
What are the best ways I can invest in my children’s futures?
If you want to invest for a child, it might be a good idea to set them up with an investment account, or to open a child savings account. There are many medium to low-risk options available, like our Junior ISAs.
- Junior ISA: A Junior ISA (JISA) is a long-term tax-efficient savings plan opened by a parent or legal guardian to invest in their child’s future, allowing them to receive a tax-free lump sum once they’ve turned 18. There are options to save in a cash Junior ISA, or invest in a stocks and shares Junior ISA.
- Children’s savings account: A children’s savings account from a high street bank is usually a cash account. This allows you to save in a low-risk way, but you should also remember that lower interest rates may mean that there is less potential for growth.
- Child’s Trust Fund (CTF): A Child Trust Fund is a tax-free savings account designed to save or invest over the long-term. All children born between 1 September 2002 and 2 January 2011 were given £250 to save into a CTF by the Government, and if you didn’t choose a provider then one was automatically assigned to the child. However, they are no longer available for children in the United Kingdom, as they were replaced by the Junior ISA. If you do have a CTF, then you are able to transfer it to a CTF with another provider, or to a Junior ISA.
- Junior SIPP: A Junior SIPP (Self-Invested Personal Pension) is very similar to a regular SIPP, however, the key difference is the account and any investment decisions are managed by the parent/guardian until the child turns 18. Under current rules, it would be transferred into an adult SIPP at 18 years old, and the child would be able to access it at age 55 or retirement.
- Friendly Society savings plans: Most friendly societies offer a range of savings plans, a key one being a child savings plan. These savings plans have special tax-efficient status, outside of the regular Junior ISA allowance, and can usually be opened by family and friends, as well as parents. Additionally, many offer other additional benefits, such as life insurance elements.
Children’s investment accounts vs saving accounts – what’s the difference?
The key difference between children’s investment accounts and children’s savings accounts is where the funds are stored. With a children’s savings account savings are stored as cash, so there is less risk as the account is designed to provide a guaranteed interest rate. However, as the funds are saved and not invested, there is less growth potential on those accounts in comparison to a children’s investment account.
A child’s investment account has the potential to provide greater growth as it is invested into assets such as stocks and shares, property and bonds. However, there is more risk as your investment can move up or down depending on the performance of the investment. It is recommended to invest over the long-term for a minimum of 5 years, as this gives your money more time to grow and to recover from periods when investment conditions aren’t as strong.
For more information visit our guide on children’s investment accounts.
Is it better to invest or save cash for children?
Whether you choose to invest or save for your child depends entirely on what you want to get out of your plan and your circumstances. If you are not comfortable with the risk of investing and intend on making short-term withdrawals, a child’s savings account may be better suited for your needs. However, if you are aiming to make potential gains on your investment, plan on saving over the long-term, and you’re comfortable with a level of risk with short-term ups and downs, a child’s investment account may be better suited. Whether you choose to invest or save for your child depends entirely on what you want to get out of your plan and your circumstances.
Can you invest a lump sum for a child?
Yes, there are savings and investment plans that allow you to invest a lump sum, such as a Shepherds Friendly Junior ISA which allows you to invest an initial lump sum from £100. You’re able to choose any lump sum amount that suits you best, as long as your lump sum doesn’t exceed the Junior ISA annual allowance of £9,000. Following your first investment, you can also make top-ups, or save monthly with a Direct Debit.
Can grandparents invest for grandchildren?
Grandparents can invest for children in a variety of savings plans, including a Junior ISA. However, only a parent or legal guardian can open and manage a Junior ISA, so while grandparents can contribute to gift money to their grandchildren you should be aware of this.
Thinking of investing for your kids? Open a Junior ISA today.
Be sure to read through our Important Information Guides for all the key information about our Junior ISA. Remember that when you invest, your capital is at risk.