Discover the best long-term investment options for parents who want to secure a brighter financial future for their children, as well as the most important factors to consider before investing.
Junior ISAs (JISAs) are popular long-term investment options for children, providing tax-efficient savings with cash and stocks and shares options.
Junior SIPPs offer government-provided tax benefits and allow parents to invest in portfolios with potential growth, but funds cannot be accessed until the child reaches age 55.
Junior Investment Accounts (JIAs) are alternative investment options without tax-free savings, offering flexibility in contributions and access to funds before adulthood.
NS&I premium bonds offer no interest rate but provide chances to win tax-free cash prizes through monthly draws, with a minimum investment of £25 and a maximum of £50,000.
Savings accounts are a safe option for short-term funds, while investing offers the potential for higher returns and long-term financial goals. The choice depends on access needs and risk tolerance.
Junior ISAs
Junior ISAs (Individual Savings Accounts), or JISAs, are among the most popular investment options for children as they provide a tax-efficient way to invest in children’s future. It allows parents and other relatives to contribute funds tax-free into the child’s account up to a limit, called the JISA allowance.
The actual amount of the JISA allowance is subject to a change for each fiscal year, and for 2023/24, it is £9,000. Savers can always find the current allowance and additional information about ISAs and JISAs on the official government website.
Parents have control over a JISA until the child reaches the age of 16, at which point the account becomes theirs. However, they can’t access the funds until they reach the age of 18. Between the ages of 16 and 18, the child can own both a JISA and an ISA and split their investments between the two according to their needs.
There are two types of JISAs parents can open for their children:
Cash JISA, which works just like a regular savings account, but it allows investors to earn interest tax-free;
Stocks and Shares JISA where the contributions are invested into various funds, and the capital gains are not subject to tax implications.
In simple terms, cash JISAs are a safer option for parents who need an investment option for smaller and steadier returns, while stocks and shares JISAs are slightly more risky, but have a larger growth potential.
Junior SIPP
Junior SIPPs (Self-Invested Personal Pensions) are another investment option tailored for parents and their underage children that come with government-provided tax benefits. Namely, parents and other willing contributors can invest up to £2,880 per year in a single Junior SIPP account and receive 20% of tax relief on their contributions.
The funds invested in a Junior SIPP are invested in different types of portfolios offered by SIPP providers, and it’s up to the users to decide on the risk levels and potential growth opportunities.
As the case is with JISAs, the tax benefits associated with Junior SIPPs are also subject to change, and we recommend that parents check up on the latest government news related to SIPPs to stay up to date with potential changes.
It’s worth noting that children can take control of their Junior SIPP when they reach adulthood, but they won’t be able to access their money until they reach the age of 55, according to the current laws. The age limit is expected to be moved to 57 in 2028.
Parents looking to start Junior SIPPs for their kids need to be aware and consider the fact that further law changes may occur by the time their kid reaches retirement age, and act accordingly.
Admittedly, thinking about children’s pensions might be a stretch; however, parents that can look past that can actually do wonders for the retirement of their offspring.
By investing up to the annual contribution limit for the first 18 years of their kid’s life, they give them a substantial head start. And by the time their kid reaches retirement age, the investment would grow into a hefty sum, allowing them to reach their retirement goals much easier.
Junior Investment Account
Also known as a bare child trust fund, Junior Investment Accounts (JIAs) are an alternative investment option for children, but unlike Junior ISAs and Junior SIPPs, they don’t provide tax-free savings.
Because don’t have any maximum contribution limits, JIAs are the ideal option for parents who have already contributed the maximum amount allowed in Junior ISAs and SIPPs but want to invest additional funds for their children's future.
Like other investment options for children, JIAs allow parents to choose from a wide range of investment options, including stocks, bonds, mutual funds, ETFs, and more. They can tailor the investment strategy to their preferences and achieve more stable or higher returns.
Once the child reaches adulthood, they gain full control over the account and can utilise the funds for any purpose, whether it's further education, starting a business, purchasing a home, or other financial goals they may have.
Additionally, unlike Junior SIPPs and ISAs, JIAs allow parents to access the funds before the child reaches adulthood, as long as it’s used for the child's benefit. This makes them a great option for parents who want a long-term investment for their kids while retaining the right to access the funds in case of unforeseen circumstances.
NS&I Premium Bonds
While they were a very popular option back in the day, NS&I premium bonds have all but lost their appeal in modern times. Given the fact that they offer no interest rate, they are far from a long-term investment for a child but can be a more fun birthday gift than cash in an envelope.
These government-backed bonds can be bought by people over the age of 16 and can be gifted to children under 16 by parents, grandparents, and great-grandparents.
Rather than earning from interest, a premium bond holder enters a monthly prize draw where they have the chance to win tax-free cash prizes, ranging from £25 to £1,000,000. Just like with any lottery, the odds of winning a prize are determined by the total value of the bonds held.
The minimum that can be invested in an NS&I premium bond is £25, while the maximum is £50,000. Kids with premium bonds take control over their accounts when they reach the age of 16, at which point they can decide whether to keep the bonds or cash them in.
If they decide to keep the bonds, they will continue to be eligible for the monthly prize draws. If they choose to cash them in, they will receive the principal amount of the bonds in its entirety, along with any prizes they won, and don’t have to pay tax on them.
Premium bonds are still attractive in the eyes of some investors as they are backed by the government and are essentially a 100% safe investment.
However, unless the child gets lucky and wins a massive prize, without interest, the value of the investment can erode through inflation and opportunity costs. For this reason, while fun and unique, NS&I premium bonds are highly speculative and may not be the most effective means of growing wealth or generating income over the long term.
Children’s Savings Accounts
As a final option, instead of getting an investment account, parents who want to play it safe can always start a savings account for their children.
Creating a safety nest for children by putting money in a savings account is a common practice, but it’s not a long-term investment, as savings accounts don’t have the potential for growth like other investment options.
Parents can open a savings account for their children as soon as they are born, and kids can take control of their accounts and learn healthy financial habits at the age of seven.
There are two main types of savings account for children:
Instant access savings account, also known as easy access savings account, is the more flexible type and allows users to deposit and withdraw funds at any time;
A regular savings account, which is a bit more rigid, requires a set amount of money to be deposited on a monthly basis for a specific period of time and restricts early withdrawals.
Out of the two, regular savings accounts generally tend to offer higher interest rates.
It’s important to point out that while both saving and investing are financially responsible practices related to securing financial freedom, they are inherently different and serve two different purposes.
Saving vs Investing for a Child
As previously mentioned, saving and investing aim to achieve two fundamentally different goals.
Saving is setting surplus money aside and keeping it in a safe place from which it can easily be accessed later when required.
Investing is using surplus money to purchase assets or make financial commitments with the expectation of generating a return or increasing wealth over time.
Here’s a table that displays the main differences between saving and investing.
Saving | Investing | |
|---|---|---|
Purpose | Preserve and accumulate funds | Grow funds over time |
Return | Typically low-interest rates | Potential for higher returns |
Risk | Generally low risk | Varies depending on investment choices |
Time Horizon | Short to medium term | Long term |
Growth Potential | Limited growth | Potential for significant growth |
Liquidity | Funds readily accessible | May have restrictions or lock-in periods |
Inflation Protection | Limited protection | Potential for better inflation protection |
Investment Options | Savings accounts, fixed deposits, etc. | Stocks, bonds, mutual funds, etc. |
Education Funding | May be suitable for short-term education savings | Can help build substantial funds for education |
Long-Term Financial Goals | May not generate sufficient returns for long-term goals | Can potentially help achieve long-term goals such as retirement savings |
Risk Tolerance | Suitable for risk-averse individuals | May require higher risk tolerance for potentially higher returns |
While most savings accounts allow earning interest, it’s usually barely enough to cover inflation and not enough to cover the opportunity costs. As a result, while savings accounts are great at playing their specific role, they essentially can’t be considered a long-term investment.
What to Consider Before Investing for Children
As you can see, there are multiple ways to invest or save money for children, and picking out the best option along with the investment platform depends on a few important factors.
The first thing you need to decide is whether you are looking to save or invest money long-term.
As mentioned above, investment accounts usually come with specific restrictions like early withdrawal penalties or limitations on when you can withdraw the funds without incurring additional fees.
If you can’t afford to lock the money away for a longer period of time and want the option to access it when necessary, look no further and just get a savings account.
However, if access is not a problem for you and you are looking to build wealth over a longer time, take note of the following considerations.
The Amount of Money You Have
You may prefer a specific investment type on paper, but when you consider the budget you are working with, it may not always turn out to be the perfect solution.
Keep in mind that the amount you invest may vary depending on your goals and the specific investment options you choose. Some investment options may require a minimum initial investment, while others may allow for regular contributions over time.
This is why it’s very important to assess your financial situation and determine how much you can comfortably allocate towards investments for your children. Take into account your current income, expenses, and other financial obligations to establish a realistic investment amount.
By carefully evaluating your financial capabilities and you will be able to select investment options that align with your available funds.
While everyone wants the best for their children, it’s essential to strike a balance between investing in your children's future and maintaining your own financial stability. Make sure you have enough funds to cover your immediate needs and emergency savings before committing to long-term investments.
Your Child’s Age
Another key factor that can make a huge difference is exactly how young your kid is and what is their time horizon.
Infants and toddlers have time horizons of 15 to 20 years, which means they have more time for their investments to grow. This allows parents to take a more aggressive investment approach as there is more time to weather market fluctuations and benefit from compounding returns.
Coupled with the other factors, the age of your kid can give you a pretty good idea of which investment options are more suitable and which ones you’d be better avoiding.
Parents of younger children can consider allocating a higher percentage of the investment portfolio towards growth-oriented investments, while parents of teenagers may want to adopt a more conservative investment approach.
Tax Implications
As with any investment, tax implications are a very important consideration you need to keep in mind when investing for your children.
Earlier, we mentioned the specific types of investment accounts that can provide you with tax benefits, and you should take advantage of them to the fullest. However, you should always stay up to date with yearly allowances and limits to understand how much exactly you can contribute tax-free.
Additionally, remember that JIAs don’t provide the same benefits as Junior ISAs and SIPPs, and if you are looking to start one for your kid, make sure you understand all tax implications associated with it.
There are multiple types of tax related to investments, including capital gains tax, dividend income tax, and even inheritance tax you need to be aware of.
Understanding the tax implications can help you invest and earn efficiently while making the most of your capital and building your wealth. If you are having problems, remember that you can always consult a financial advisor that can help you make the right decision and pick the best investment option for your specific situation.
