The financial planning journal

Investing for children

4 October 2021

So how do you go about investing for your children? This is something that clients regularly enquire about and the answer is slightly dependent on your circumstances.

As a useful guide, I have provided an overview of some of the most common options below…

      1. Children’s easy access saving account

These savings accounts are often the first consideration for many parents. However, they suffer the same issue as any other savings account. Ultimately, the cash will fall in value over time due to inflation so, for the longer-term, these are poor investment options. If, however, you are saving for something in the near term, the flexibility of an easy access savings account can be highly beneficial.

      2. Premium Bonds

Premium bonds certainly have their place but they’re slightly less attractive than most people believe. 70% of individuals holding up to £1,000 in Premium Bonds will not win anything. Those who have £10,000 in Premium Bonds receive, on average, winnings equivalent to a 0.75% annual return. It’s perhaps a little better than some of the savings’ rates available but, again, you will probably lose money to inflation over the long term.

One perk is that instead of ‘interest’ you have a ‘prize fund’, with the chance to win a million pounds. However, it is important to highlight that you actually have better odds of winning the EuroMillions! Premium Bonds are perhaps not the best financial bet, but can be useful from an educational perspective – giving a child the chance to win £1 million, whilst saving effectively can be a great way to get them engaged!

      3. Junior pensions

Junior pensions can be used to invest in any fund, so you may outpace inflation. In addition, you’ll receive 20% in tax relief on contributions. So, if you contribute the maximum of £2,880 into your child’s pension, you’ll receive another £720 in tax relief, magically turning this sum into £3,600.

The money also can’t be spent until the child reaches retirement age, removing any risk that they’ll blow it! However, this is also where a child’s pension falls down. In most circumstances, your child will benefit the most from using this money to help with a house deposit. You might find yourself in a position where you want to help them with this but you can’t access the money. Furthermore, your child could become a reasonably high earner in the future, so saving for them in a child’s pension could unintentionally cause future lifetime allowance issues. Ensure you tread with care.

      4. Junior ISA (JISA)

This is the most common investment option for children. JISAs act similarly to any other Stocks and Shares ISA. You can, again, invest in almost anything with the aim of beating inflation. However,  there is no tax relief applied to contributions and an annual limit of £9,000 is applied.

Once the money is in a JISA, it’s completely tax-free and your child can’t get their hands on it until they’re 18. After this point, they can access the money as they wish so they won’t encounter the same issues as with a Junior pension. For some parents, 18 might be slightly earlier than you are comfortable with though.

      5. Keeping the money in your own name

Overall, I’d only consider these options if you’re already maxing out your own ISA allowances and making use of your annual capital gains tax allowance. Otherwise, it might be better to invest the money yourself and give it to your children at a time that works best for you and your family.

 

Saltus Financial Planning Ltd is authorised and regulated by the financial conduct authority. Information is correct to the best of our understanding as at the date of publication. Nothing within this content is intended as, or can be relied upon, as financial advice. Capital is at risk. You may get back less than you invested.

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