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For parents or relatives thinking of investing for children, the earlier you start, the better. That way, you can take full advantage of their growing years to allow the investment to appreciate as much as possible, but what’s the best way of investing for kids, and how do the various options work?
|Can I invest on behalf of my child in the UK?
|Yes, you definitely can
|Types of investment accounts can I open for my child in the UK?
|Junior ISA, Junior SIPP, Junior Investment account, Children Premium Bonds, and Child Trust
|Can I buy stocks and shares for my child in the UK?
|Yes, using a Junior Stocks and Shares ISA, Junior SIPP, Trust, and Junior Investment account
|When can my child have access to their investment account?
The difference between saving and investing
Before we get into the nuts and bolts of investing for children, we should stress that investing is not the same as saving.
Saving is basically putting money aside a little (or a lot) at a time into a bank account that earns interest. People have several reasons for saving. First, they save for specific things such as a house deposit or a holiday. Money is also aside for emergencies that might occur in the future. Saving options include ordinary savings accounts in banks, building society accounts, or credit unions.
On the other hand, the aim of investing is to grow your money by buying assets that might appreciate in value, such as stocks, mutual funds or property. People make investment decisions for reasons such as retirement or pre-tax investing.
Inflation and the value of money in real terms
The big problem with any savings is the interest rate applicable to money in the account. If the interest rate is not high enough to counter inflation, any money put into savings accounts will lose value in real terms. In the UK, the best savings accounts that offer good rates are Fixed-Rate Bonds, and even the best only offer 6.0% AER.
With the current UK inflation rate in 2023 running at 6.8%, you can immediately see the disparity in terms of how much interest money invested in a savings account earns, as opposed to how much it will lose through inflation. So, in effect, any money you put into children’s savings accounts loses value in real terms on a year-on-year basis.
Investments can earn considerably more. For example, over the past decade in the United States, the average return on investments in domestic stocks was 13.8%, while the average return on International stocks was 5.8%.
Best children’s investments
There are several ways to invest in a child’s future, and we have handpicked some of the best children’s investments available today.
- Junior ISA: A Junior ISA is one of the best children’s investment accounts in the UK because a JISA is a long-term, tax-free investment account. It has become an excellent way for parents to start investing for children until the child reaches the age of 18. Parents or guardians can open a Junior ISA and save up to £9,000 tax-free each tax year. Parents have complete control of the JISA until the child turns 18. There is the option of investing in a Junior Stocks and Shares ISA or a Junior Cash ISA.
- Junior Self-Invested Personal Pension (SIPP): It is never too early to start saving for a child’s retirement. Parents can give their children a head start by opening a tax-efficient Junior SIPP. Parents benefit from the significant tax relief associated with a Junior SIPP as they can invest up to £2,880 each tax year with a 20% government top-up. The total amounts to the £3,600 annual contribution limit. The Junior SIPP investment portfolio comes with a wide range of investment options. This retirement account can only be accessed when the child reaches the retirement age of 55.
- National Savings & Investments Premium Bonds for Children: Parents, grandparents, great-grandparents, guardians or family friends can make lump sum investments on behalf of a child under 16 by buying NS&I premium bonds. With premium bonds for children, investment contributions can range from £25 to £50,000, and the child stands the chance of winning tax-free prizes, up to £1 million. When the child reaches the age of 16, they take possession of the account.
- Savings Account: Parents can set up a regular savings account or an easy-access savings account for their children. These savings accounts have their advantages and disadvantages. So, as a parent, it is advisable to seek financial advice when choosing the right savings account for you and your child.
Junior investment account
A junior investment account, also known as a “Bare Trust”, is a type of fund and share account that is set up as a bare trust. Assets are held by a trustee (e.g. parents or grandparents) for the future benefit of a beneficiary (e.g. children or grandchildren). This child trust fund is in the child’s name, just like a JISA or Junior SIPP. However, a junior investment account is different from a Junior ISA or a Junior SIPP. A junior investment account does not have a yearly maximum investment limit, and there is no automatic account transfer when the child turns 18.
A junior investment account is not a tax-free savings account, and its tax treatment is different from that of a Junior ISA and a Junior SIPP. This is because a junior investment account is subject to capital gains tax and income tax depending on the contributor, contribution, and account growth.
For example, interest above £100 each year from a parent’s contribution will be taxed as income on the part of the parents if the child is under 18. Also, profit above the beneficiary’s £12,300 capital gains tax (CGT) allowance each tax year will be subject to CGT tax.
However, in the long term, a JIA can reduce the amount of inheritance tax (IHT) that the beneficiary might pay in future. If the parent/grandparent survives for seven years after gifting the money to the beneficiary, the fund is exempt from inheritance tax.
Unlike a JISA or Junior SIPP account, parents have access to the funds in the JIA before the child turns 18, as long as the money is used for the child’s benefit. The flexible access to funds makes Junior Investment Accounts an attractive option for parents looking to save up for their children’s school fees or sports activities.
Harness the power of long-term investing
Earlier in this article, we mentioned the risk attached to investing for children and investing in general and noted that the value of investments could rise and fall. Investing in the long term is one of the best ways of dealing with risk.
When the value of investments falls as they sometimes do, you’re only in danger if you want to withdraw your investments when their value is low. Their value usually recovers and increases over time, so if you can ride out the storm, all is well and good. To minimise any risk, a child investment account that will be of best worth should be a long-term investment (over the child’s growing years).
Whether you’re investing a lump sum for a child or saving smaller amounts regularly, the interest applied to a child investment account is compound. In other words, the interest earns interest. That might sound a bit like double Dutch, so this article is worth reading for a more precise explanation of what compound interest is and how it works. Suffice it to say that compound interest is a considerable benefit when applied to investment accounts for kids.
Investing in children – Stocks and shares JISAs
A top choice investment for a child’s future welfare is a Junior ISA or JISA. JISAs come in two options – a Cash JISA or a Child Investment ISA, also referred to as a Stocks and Shares JISA. Cash JISAs are not much different from ordinary savings accounts. The interest might be a little better, but only fractionally so.
If you are a grandparent thinking of investing for grandchildren, you cannot open a JISA for them yourself. Only the actual parents or guardians with parental responsibility can do that. However, grandparents, relatives or friends considering investing in a child’s financial future can contribute to an established child investment plan or Stocks and Shares JISAs.
The money invested in a Child Investment Account or Stocks and Shares JISA is like money put into a trust fund. The child whose name the account has been opened cannot access the funds until their 18th birthday, after which the Junior ISA turns into a standard ISA. However, the child in question can manage the account once they reach the age of 16.
Children’s investment plan
When it comes to investing for children, choosing the right children’s investment plan can be tricky. The investment strategy for children’s investment plan will depend on several factors. First, you must consider the definitive financial goals of the child, such as the cost of education, investor profile, inflation, and investment product options. These will help you determine which type of savings or investment account to open and how much to save or invest each month.
The most important thing to remember always is to pick financial services and products authorised and regulated by the Financial Conduct Authority (FCA). When in doubt, please speak with your financial advisers.
Socially Responsible Investing for Children
Socially responsible investing is a growing trend that emphasizes ethical considerations, environmental sustainability, and positive societal impact. When it comes to investing for children, this approach takes on a unique significance. By choosing investments that align with values such as human rights, environmental stewardship, and community development, parents can not only secure their children’s financial future but also instil in them a sense of responsibility towards the world they inhabit.
In the context of children’s investments, socially responsible investing can be a powerful tool to teach them about the broader implications of financial decisions. For parents looking to explore the best way to save money for their kids, including tips on saving for kids, they can find here a comprehensive guide.
This approach ensures financial growth and fosters a generation conscious of its impact on the world, making investment choices that reflect a commitment to social and environmental well-being.
Teaching children financial literacy and investing skills
If you want to enable your child to manage their Investment JISA from the age of 16, teaching them financial literacy and investing skills is paramount. As soon as your child goes to school and starts to grasp the concept of arithmetics, it’s a good time to start talking about their child’s investment account. It’s not rocket science; the sooner you begin, the better.
You can start by encouraging the child to check on how the investment is performing. Even though they can’t influence how it performs, getting them to follow its progress will stimulate curiosity and interest.
Further advice on opening a child investment account
The big advantage of investing in a Junior Investment ISA is that it is a tax wrapper account, so it is not subject to income or capital gains tax. You or anyone else who wishes to contribute to the investment can do so, providing the total contribution per annum is no more than £9,000. It’s also worth noting that contributing to a JISA does not affect your adult ISA allowance.
If you’re concerned about the risk of investing rather than saving, you can open a Junior Cash ISA and a Junior Investment ISA and split any risk. However, please note that although a child can have one of each, you cannot open them both in the same year. You can only open one.
Investing for children is essential for their future. Unfortunately, knowing which route to go down is not easy, but if you want more information about junior ISAs, click here.
Why should I invest for my child?
Investing on a child’s behalf can boost their financial status and confidence. In addition, it will help with expenses such as education costs, home purchases and retirement.
How do I put my child up financially?
Set up a savings or investment account for your child, such as a child trust fund, Junior ISA, Junior SIPP, Children’s Premium bonds, etc., then start saving a certain amount as frequently as possible.
Which is the right account for my child?
There is no definite answer to which account is right for your child, as it depends on individual circumstances and financial goals. For instance, you need to consider that a Junior SIPP can’t be accessed before age 55 when thinking of investing for children. Also, Investments can be volatile, so your children may end up with less than they originally put into them.
*Capital at risk. Tax treatment depends on your individual circumstances and may be subject to change in the future.