Investing for children? Here's how you can do it

In the past we expected to make more money than our parents when we grew up. Today’s children have a tougher financial future waiting for them.

Popular goals such as owning a home and completing university now have hefty price tags attached - and they just keep getting more expensive. In September 2020 the Office for National Statistics¹ showed it takes nearly eight times an average annual salary to buy a house in England and nearly 12 times the average annual salary to buy a house in London.

And kids keen on full-time university education need to stump up £9,250 for the 2022/23 academic year. This wasn’t always the case: university fees were introduced in September 1998 for £1,000 a year².

Putting money aside for a child’s future is an efficient and practical way to give their independence a boost when they come of age and help them learn how to manage their money along the way.

Why invest rather than save cash for a child’s future?

Investments need years - we say at least five years at Bestinvest - and if you have years available, investing can put your money to work and provide a bigger nest egg when a child turns 18.

Yet most people choose to save in cash rather than invest because they want to safeguard their kids’ money for the future and saving seems a reliable option. Investing is inherently risky at first glance, because investments fluctuate in value and you could get back less than you put in.

Yes, cash is safer - you won’t lose your money - but it struggles to keep pace with inflation, particularly when interest rates are low. This means that the amount you can buy with your cash erodes over time. So while you’re trying to build a nest egg to hand over to a child when they turn 18, inflation is eating away at it. It’s a bit like trying to climb up a down escalator.

Money invested in stocks and shares has typically performed better than cash savings over long time periods and, when you’re investing for a child’s future, you have time on your side. If markets go down, you should have time to wait for your investments to recover and, hopefully, grow.

How do I invest money for a child’s future?

The easiest way to invest money for a child is by opening a stocks and shares Junior ISA - a tax-free way of growing money until a child turns 18. Junior ISAs were introduced by the Government in 2011 to encourage us to put money aside for kids for the future. 

Mums, dads and guardians can open a Junior ISA and anyone can pay into it, up to the annual limit of £9,000. When the child turns 16 they can manage the money if they like, but they can only access their funds when they turn 18.

After their 18^th birthday their stocks and shares Junior ISA automatically rolls over into a regular adult ISA with all the bells and whistles. 

How can a stocks and shares Junior ISA make investing for children easier?

Have a look at our example scenarios³. All figures quoted are for illustration purposes only and are not guaranteed.

• In our first scenario, a generous grandparent saves £9,000 - the maximum allowance - into a Junior ISA each year from birth until their grandchild turns 18. They invest at a monthly rate of £750 and achieve a 6% annual compound growth rate after fees. This results in an impressive nest egg of £290,514 for their grandchild. 

If the grandparent stopped contributing to the Junior ISA at this point but it was left untouched for three years while the grandchild was at university, this sum could grow to £347,652 by the time they turned 21 and graduated if it continued to grow at 6%.

• Scenario 2 is probably more typical. A parent pays £100 a month into a stocks and shares Junior ISA over an 18-year period. Over this time, at a compound annual growth rate of 6%, their child’s nest egg still adds up to a very meaningful £38,745, providing a valuable financial head start for this teenager.
  
  

Despite these compelling numbers, HMRC data shows that 69% of Junior ISAs opened in 2019/20 were cash accounts and only 31% Junior investment ISAs.

I have other accounts for a child - can I transfer to a Junior ISA?

Yes.

If you already have accounts set up for a child you can transfer them to a stocks and shares Junior ISA.

What happens to a Junior ISA when a child turns 18 - what if I don’t want to hand over the keys?

Eighteen years can go by in a blink. After all that time squirrelling money away, making strategic investment decisions and doing everything you can to make sure a child has what they need, handing over the keys to the Junior ISA can feel daunting. What if they blow it all or it derails them? We’ve got a couple of suggestions that can help you.

If you are keen to prepare a child for the road ahead, ask them if they want to learn more about managing their money. You’d be surprised how many kids want to learn about investing!

Have a look at the London Stock Exchange’s programme for primary and secondary school children: Financial Literacy for Children. Or check out the colab between the Bank of England and Beano for kids aged 5 to 11 called Money and Me.

And if you really can’t stomach the idea of handing a pot of money to an 18-year-old, there are options other than Junior ISAs that give you more control. For example, you could set up a trust. Our parent company Evelyn Partners can help with this.

We can help you invest for a child’s future

Our stocks and shares Junior ISA is easy to open and manage. You can choose your own investments or use one of our Ready-made Portfolios. 

Opening and transferring to our Junior ISA doesn’t cost you a bean - and we have a friendly team ready to help you. See our Junior ISA or give us a call on 202 7189 2400.

Important information

This article does not constitute personal advice.  If you are in doubt as to the suitability of any particular course of action, please contact a financial adviser.

The value of an investment may go down as well as up, and you may get back less than you originally invested.

Prevailing tax rates and reliefs depend on your individual circumstances and are subject to change.

Sources

1. Office for National Statistics, House price to workplace-based earnings ratio

2. UK Parliament House of Commons Library, Higher education tuition fees in England

3. Tilney