How to Save and Invest for Your Child’s Future

Saving for your children’s future today is a gift for their livelihood long-term, but knowing the best ways is tricky

WORDS BY
Maria Collinge
Published
January 19, 2024
There are various ways to invest in your child's future so it's time to find out what those are (Image: Dakota Corbin/Unsplash)
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Money & Life
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With the cost of living crisis alive and kicking and the price of property, weddings and education getting alarmingly higher with every year that passes, starting to save for your child’s future sooner rather than later is going to make a huge difference.

Let’s cover off some of the key ways that you can save for your child’s future and their various pros and cons.

The basics of childrens' accounts

There are lots of different options out there that you can use to set your child up for a strong future. Wading through the various options can be a little overwhelming and understanding the various advantages and disadvantages of the Junior ISA vs the Junior SIPP for example, can quickly become overwhelming when you already have your hands full with little ones!

As a rule of thumb, the longer time period that you have, the more risk you can afford to take when it comes to investing. With time scales less than fuve years, it isn’t wise to invest savings, as you may risk falling victim to the ups and downs of the markets. What you want to achieve with the savings for your child, how old they are and how far away the goal is will all affect which account is going to be best for you and the kiddo. 


Children's bank accounts

As a parent or guardian, you can set up a bank or building society account on behalf of your children. It is an easy and simple place to start depositing money and saving away spare pennies. Most places will let you open an account with as little as £1 and they can be opened for a child up to the age of 18. There are two main savings accounts to be aware of: instant access and regular savings.

  • Instant access allows you to take out the money at any time without any penalties or hurdles. As a result, it often provides a lower rate of interest. This may be best for shorter term options, as interest rates currently aren’t beating inflation, which will erode your savings over a longer period of time. 
As a parent or guardian, you can set up a bank or building society account on behalf of your children (Photo: Jonathan Gallego/Unsplash)


  • Regular savings are designed to save a set amount every month for a certain period of time. If you take the money out sooner than the bank account stated in the terms and conditions when you set it up, it may reduce the interest you receive. Regular savings accounts often pay a higher rate of interest, in exchange for the lack of access that you have to your money.

Pros of children’s bank accounts

  • Security: The money isn’t invested so you know that you can access it and there isn’t risk of the value dropping. 
  • Flexibility: Unless the regular saver stipulates that you can’t withdraw before a specific time, you’ll have flexibility on when and how you take the cash out, meaning that you can spend it whenever your child desires. 
  • Learning: The account may or may not pass to the child aged 18, depending on how it was set up. This gives your children a vital opportunity to learn and the time to mature whilst seeing the value of money. 

Cons of children’s bank accounts

  • Growth potential: With interest rates being low and inflation being high, there’s a risk that the real value of any money saved will lose value, which could leave your child missing out in the long run. 
  • Lack of discipline: Unless the regular savings account stipulates a lock in period, there is total flexibility on what you pay in and when you withdraw. For some, this lack of discipline for both parents and adults can mean that the ball never quite gets rolling. 

Want to find the best possible interest rate? You can find comparison sites online that compare the rates. So make sure you use these helpful tools! 

Junior ISAs (JISA)

Junior ISAs are open for all children under the age of 18 and give them an ISA allowance, that is separate to that of their parent’s. Once a parent or guardian sets up a JISA in their child's name, they can save £9,000 per tax year into the JISA, which then has the same tax protections as other ISAs (AKA no tax on growth nor interest). Grandparents, godparents and any other kind and willing friends can also contribute, which will all allow them to save and/or invest towards the child’s future. 

It's powerful to plant the seeds early for your child's future.


Each child can only have one JISA. But if you yourself have multiple children, each one of them is allowed a JISA. So for each one you open, you’re extending your ISA limit by £9,000 per child. Pretty neat!

Once the child turns 18, the account becomes legally theirs and technically they can do as they please with the contents of the account. There are no specific rules on what they must spend it on, but it’s always a good idea to sow the seeds early on the financial education front to try and ensure it’s spent sensibly.

There are two types of JISA to be aware of: the cash and the stocks and shares. The Cash ISA can be a great saving option because your child (or you as the parents) will not pay any tax on the interest earned. However, over the longer term, the rate of interest paid may be eroded by inflation. The Junior Stocks and Shares ISAs allow you to select stocks, funds, ETFs and bonds to invest the funds on behalf of your child. This has a greater potential for growth but also a greater potential for loss. 

Pros of JISAs

  • Tax: Every child has £9,000 per year that they can save towards their future, without the worry or hassle of taxes on growth or on interest. That’s £162,000 worth of tax free savings over the course of their childhood if you get cracking once they’re born! 
  • ISA allowance: Every child has a £9,000 per year allowance that can be used tax free for savings for their future. This is separate to each parent's allowance of £20,000, giving more tax free savings to the family.

Cons of JISAs

  • Control: Once the child turns 18, the funds saved in the JISA become theirs. If they haven’t been taught to be disciplined with money, this could mean that their lifetime savings go rapidly on activities that you may not gain your approval. 
  • Limits: It’s £9,000 per year, per child, that can be saved. If grandparents and other relatives are feeling generous and wanting to donate more, these limits can’t be exceeded, which will mean other options will need to be sought out. 
(Image: Female Invest)

NS&I Premium Bonds

Premium Bonds are a savings option for your children’s future that is quite popular for those wanting something lower risk. There used to be specific children’s bonds, but these are no longer available. However, you can still buy the regular premium bonds and allocate them to the child's name when they turn 16. 

Premium bonds can be bought for as little as £25 and you can invest all the way up to £50,000. Every month, each £1 that is entered will be entered into a prize draw that can win up to £1,000,000. If you are lucky enough to win this bumper prize, it’s tax free, as are all other winnings with premium bonds. An extra bonus is that it doesn’t just have to be parents who invest on behalf of children, other relatives, grandparents and friends can also do the same. 

The opportunity to win is big, but you can also win nothing. The odds are regularly updated so that you can see how likely it is that your children’s savings will win, but of course, there’s always the opportunity that you will come away with nothing. There is also no interest paid in the meantime whilst the cash saved for the kids is locked away, so there’s a real opportunity cost to weigh up. 

Premium bonds can be a fun option for kids, they’re able to check their bond numbers each month online to see if they have won. It might not be something that everyone wants to encourage but it can be a way to educate them on various aspects of finances. Premium bonds can also help those who are using the full £9,000 in the Junior ISA and need more options, as you can save a further £50,000 with the premium bonds. 


Pros of NS&I Bonds

  • Tax: Any winnings that are made from the bonds are tax free, and you can invest up to a maximum of £50,000. 
  • Potential gains: When buying an NS&I Bond, there is potential for big gains. This is up to the value of £1,000,000 which really would set your children up for the future!

Cons of NS&I Bonds

  • No guarantees: It’s a prize draw, like a lottery. There’s no guarantee that your investment in the bonds will win and if not, you’ve lost out on other potential avenues that could’ve grown. 
  • Time: There is no fixed time nor purpose to the bonds, they’re drawn once a month and you can continue to keep hold of them until they mature. This can make the saving a little purposeless and potentially cause friction down the line. 

Children’s pensions

When looking at your adorable young children, you would probably never consider saving for their retirement. However, you could be setting them up for later life by considering a Junior SIPP. 

Any parent or guardian can set up a pension for their child, and when they turn 18 it will automatically transfer to them. They can then continue to contribute to the pension. Of course, they won’t be able to access this until they’re 57 (or maybe even later by the time that they get there!) but it will be in a dedicated pension environment. 

You can save up to £2,880 each tax year into your child’s pension. The government will then top up the contribution by 25% which is essentially tax back, meaning your contribution automatically becomes £3,600. Any growth within the pension is free of tax. That means that if investments grow or receive dividends, there are no taxes. When the child withdraws from the pension, they will have 25% tax free and after that they will need to pay income tax on what they take out of the pension. 

If you’re not convinced by the long game, take a look at this example

If you invest the maximum amount for just three years of £8,640. This will be increased to £10,800 by the government. Assuming the pension grows by 8% over 50 years, your child’s pension could be worth £582,000 in 50 years. 

Pros of Junior SIPPs

  • Tax: Any contributions up to £2,880 and growth on investment will be free from tax. This can make a huge difference to your children’s future as that’s a whole lifetime of potential savings. 
  • Growth potential: As you make the decisions on the stocks or funds that the pension is invested in, you can give the savings a much greater growth opportunity than if they’re in cash over a longer period of time. 


Cons of Junior SIPPs

  • Flexibility: Once you open a SIPP, your child won’t be able to access those savings or investments until they’re at least 57, and it might even be more by the time they reach retirement age. This can mean that they can’t spend the money on other milestones like a property, education or getting married. 
  • Maximum Contributions: Compared to the JISA and NS&I, the annual allowance on a pension is relatively small. This can mean that it is quickly maximised and other options need to be explored.


The bottom line

When it comes to investing in your children’s future, putting aside a small amount regularly can really add up. There are lots of different ways that you can both save and invest for your children’s future all with their own pros and cons. The key thing to remember is that whichever option you choose, the sooner you start, the better it will be for the kids!

Tags
Money & Life

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