Investment Options for Children
Many parents and grandparents are eager to secure a bright financial future for their children or grandchildren. Providing a solid financial foundation is one of the most meaningful gifts you can offer, and one of the best ways to achieve this is through savvy, tax-efficient investments that grow over time. By starting early, you can harness the power of compound growth and leverage various tax incentives available in the UK, which can have a lasting impact on a child’s future.
Let’s explore the best ways to invest for a child’s future while safeguarding family wealth.
Junior ISAs - The Basic and Benefits
Let's start with one of the most popular tax-efficient ways to invest for children in the UK: The Junior ISA. Junior ISAs, known as JISAs, are a great way to build up a tax-free pot of savings for a child that they can access once they turn 18.
Key Points of Junior ISAs:
You can invest up to £9,000 per child per tax year into a Junior ISA.
There are two types of Junior ISAs: Junior Cash ISAs and Junior Stocks and Shares ISAs.
Cash JISAs work like regular savings accounts, except the interest is tax-free.
Whereas Stocks and Shares JISAs allow you to invest in a range of assets such as shares, bonds, and funds.
The money in a Junior ISA cannot be withdrawn until the child turns 18, making it a long-term investment vehicle, depending on the age of the child.
Once the child turns 18, the Junior ISA converts into a regular ISA, and the child takes control of the account.
So, why Use a Junior ISA? The tax-free growth and flexibility of investment options make them a great tool for helping a child or grandchild get a head start in adulthood. Whether you’re using it to save for their education, a first home, or another major life milestone, the compounding effect of early investments can lead to significant growth over time.
If you are comfortable with some risk, a Stocks and Shares Junior ISA is likely to offer better long-term growth compared to a Cash Junior ISA, especially when investing over a decade or more.
Pensions for Children - Securing Retirement Early
It might sound surprising, but starting a pension for a child is one of the most tax-efficient ways to invest in their future.
How Does It Work?
You can open a Self-Invested Personal Pension, or Junior SIPP for a child, and although they won’t access the funds until they reach retirement age, the long-term growth potential is enormous.
You can contribute up to £2,880 per year, and the government adds a 25% tax relief, turning that into £3,600 per year.
The money invested in a child’s pension grows tax-free, and with decades of compounding ahead, even modest contributions can grow into a substantial pension pot by the time they retire.
Why Start a Pension for a Child?
The advantage of starting a pension early is the power of compounding over a long period. A child’s pension fund will have the opportunity to grow for decades, offering a strong foundation for their retirement. Even small contributions can grow into a significant amount, thanks to time and tax relief.
For example, if you contribute the maximum £2,880 annually for 18 years, with the 25% tax relief added, and the investment grows at an average rate of 5% annually, by the time a child reaches retirement age, they could have a pension pot worth several hundred thousand pounds.
Trust Funds - A Flexible Way to Manage Wealth for Children
Trusts are another powerful tool for investing for children, especially if you want to maintain control over how and when the money is accessed.
Advantages of Trust Funds:
Trusts offer flexibility over when and how a child can access the funds, determined by the trust and the trustees.
Gifts into a trust can be subject to inheritance tax (IHT) if not planned carefully, but trust funds are a good option for those looking to manage larger estates or wishing to reduce potential IHT liabilities.
Trusts can also provide protection against creditors or future partners, helping to safeguard family wealth.
Case Study – John and Lisa’s Trust Fund
Let’s take a look at John and Lisa, a financially savvy couple who have worked hard to build up savings. They wanted to set aside £100,000 for their two children, Tom and Emma, but were concerned about giving them such a large sum outright when they turned 18. After all, the idea of handing over £50,000 each at that age felt risky, as they worried that their children might not yet have the maturity to manage such a large sum responsibly.
The couple also wanted to ensure that the money would be used for important life milestones, such as paying for university education or a first home purchase. To solve this, John and Lisa consulted a financial adviser, who recommended a discretionary trust.
They appointed themselves as trustees, along with a trusted family member, and set clear conditions on how the funds could be accessed. Some of these conditions included:
The cost of Education expenses, where the trust could pay for university tuition and living costs for their children while studying.
Financing their First-time home purchase, allowing Tom and Emma to access the funds when they were ready to buy their first homes, with a cap on how much they could withdraw.
And Staggering payments, rather than releasing a lump sum at 18, the trust allowed for smaller, staggered payments over time, helping to ensure that the children didn’t receive all the money at once.
By the time Tom and Emma were in their 20s, they had each received support from the trust for their university fees. As they approached their 30s, the trust provided them with the financial help they needed to put down deposits on their first homes. The residual amount continued to grow within the trust, providing financial support when they needed it.
Setting Up Investment Accounts - Long-Term Growth Through Stocks & Shares
For parents or grandparents who are looking for more control and the potential for higher returns, setting up a separate investment account can be a good strategy.
Key Features:
You can set up a General Investment Account, or ‘GIA’, or an ISA in your own name with the intention of gifting the investments to a child when they come of age.
This allows you to choose the investment strategy and take advantage of any personal tax allowances.
Capital Gains Tax is something to watch with GIAs, especially if you plan to sell assets at a profit. However, with careful planning, you can use the CGT exemption (currently £3,000 per year) to reduce and tax due on gains when passing funds to kids.
Why Use an Investment Account?
While Junior ISAs and pensions are tax-efficient, they come with restrictions on access. A General Investment Account offers more flexibility, allowing you to manage when and how to gift the investments to a child. This also allows an investor to retain control of the funds until they’re ready for transfer.
By investing £5,000 per year in a diversified portfolio, dedicated for a children’s benefit, with an average annual return of 6%, you could grow a significant nest egg for a child over 18 years, even after taxes are taken into account.
Tax Implications and Managing Risk
Investing for children can be incredibly rewarding, but it’s essential to navigate the tax landscape with care to ensure you’re making the most of every opportunity. With options like Junior ISAs and children's pensions offering great tax advantages, it’s easy to build a solid financial foundation for a child, but there are important rules to be mindful of.
Tax Considerations:
Parental Tax Trap: If you give money to children and the investments generate more than £100 in annual income, you should be mindful of the parental tax trap. Income above £100 could be taxed as part of your own income. This is particularly relevant for Cash Junior ISAs or other interest-generating accounts.
Inheritance Tax (IHT): If you’re looking to make larger gifts or leave significant assets to children, it’s important to be aware of inheritance tax rules. In the UK, estates over £325,000 may be subject to a 40% tax. However, there are exemptions, such as the £3,000 annual gift exemption and the seven-year rule for larger gifts.
Capital Gains Tax (CGT): If you’re setting up investment accounts, watch out for CGT when selling assets. Planning your withdrawals and keeping gains within the annual CGT allowance is key to reducing this liability.
Managing Risk:
It's essential to balance risk and return, especially when investing for children. For long-term goals, such as retirement or future education, a higher risk portfolio (such as stocks and shares) may offer better growth potential. For shorter-term goals, you may want to consider less risky investments, such as cash JISAs.
Final Thoughts
Investing for children is not just about growing a financial pot—it’s about setting them up for a brighter future. Whether through Junior ISAs, children’s pensions, trusts, or other investment accounts, there are many tax-efficient ways to give kids a head start in life. Remember, the key is to start early, understand the tax rules, and seek professional advice tailored to your personal situation.
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No financial decisions should be taken based on the content of this website or associated videos. The guidance contained within this website is subject to the UK regulatory regime and is therefore primarily aimed at viewers in the UK. Always take full individual advice first. Regulations and legislation governing taxation, investments and pensions may change in the future.
The content on this page is accurate as of the 2024-25 tax year.