Investing For Children: Best Investments For Children And Kids (2024)

Investing for your child can be a great way to build up a nest egg for their future, whether that’s to help fund their higher education, travel during a gap year, driving lessons or a car, or even towards a deposit on a first home.

Our guide explains things to consider when setting up a long-term investment plan.

Tax treatment depends on one’s individual circ*mstances and may be subject to future change. The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of tax advice.

What are some investments for children?

To buy and hold stock market or equity-linked investments in the UK you need to be at least 18 years old. But parents can invest on behalf of children who are under 18.

There are specific accounts designed with children in mind, including Junior Individual Savings Accounts (JISAs), which can be invested in stocks and shares or in cash (more on this below). JISAs are tax-efficient, which can help your child’s money grow faster.

Should I consider investing or saving in cash for my child?

Some parents are likely to prefer the relative safe haven of cash when putting money away for a child’s future. But the most recent government figures for JISAs (published in June 2023) show a preference for stocks and shares JISAs over cash accounts.

The data shows £1.5 billion was subscribed into JISAs in the 2021-2022 tax year (the latest available data), with 58% of the total subscriptions in equity-linked JISAs and 42% in cash. This compares to 57% of JISA subscriptions being in cash the previous year (2020-2021).

Cash JISA rates would no doubt have been climbing during 2021 and 2022 as the Bank of England raised interest rates. So this switch in preference for equity JISAs could be explained by the stronger performance of the FTSE 100 in the 2021-22 tax year, compared to 2020-21. This may have enticed more people to save into investment JISAs.

Laura Suter, director of personal finance at investment platform AJ Bell, says: “As there is potentially an 18-year time horizon for Junior ISA accounts it is the ideal long-term time horizon for investing. Lots of parents default into saving in cash for their children, but they should consider investment options to boost long-term returns.

“Generally, you should invest for five years or more, so it’s ideal for younger children who have 10, 15 or even 18 years until they will touch the money. Someone who saved £25 a month from birth to the age of 18 would generate a pot worth almost £8,900, assuming they invested it and saw growth of 5% a year.

“If that same £25 a month was saved in cash earning 2% a year it would be worth £6,500 – almost £2,500 less.”

Be mindful, investing in stocks and shares puts your capital at risk.

What are our picks for the best types of investments for children?

There are a number of options for investing for kids, each with their own pros and cons, including:

• Junior ISA: parents or legal guardians can open a JISA for a child up to the age of 18 and save or invest up to a maximum of £9,000 per child per tax year. There is no tax to pay on savings or investments held inside a JISA. Cash JISAs and stocks and shares JISAs are available and parents can choose to split their child’s annual allowance between cash and stocks. But a child can only have one cash JISA and one stocks and shares JISA at any time. Funds in a JISA cannot be accessed until the child turns 18. But at 18 the JISA money belongs to the child (a child can take control of a cash JISA at 16, but cannot withdraw the money until 18).

• Broker account: you can invest on behalf of your child through a standard investment platform account. An investment or broker account may suit you if you have already used up your child’s annual JISA allowance, or if you don’t want to automatically hand over ownership of the money to the child at 18 (as happens with a JISA). Bear in mind with an investment account, even if the money is intended for your child, any investment gains will be treated as your own and you’ll be taxed on them once they reach at least £100 in any tax year.

• Child Trust Fund (CTF) accounts, which were opened for all children between 2002 and 2011, as part of a government scheme to encourage saving, are now closed. Parents can continue to pay into existing CTFs until they mature when the child turns 18. Alternatively CTF money can be transferred into either a cash or a stocks and shares JISA.

What type of investments should I consider picking for my child’s Junior ISA?

When it comes to picking investments for a JISA you’ll want to weigh up using an active fund manager or a passive fund. There’s no right answer to this, it comes down to your personal preference.

With a computer-controlled passive fund, such as an index tracker, the fees and charges are likely to be lower, but the investment can only track the performance of the market – it will never outperform it.

With actively-managed funds run by a human, you might pay more in management fees, but with the manager picking individual stocks based on a long-term strategy, the hope is that this will generate a higher return.

AJ Bell’s Suter says: “There’s no need to sit entirely in one camp, you could mix the two approaches. For example, having a broader UK stock market tracker and then using an active fund for a more specialist area, such as technology funds or stocks or emerging markets.

“Another option is to pick an all-in-one fund, which can be active or passive, which invests in a mixture of different assets. This means you only need to invest in one fund that is already diversified, rather than picking lots of different investments.”

Alice Haine, personal finance analyst at investment manager Bestinvest, says: Parents that want more of an active approach but want to remain hands-off could also consider investing in a ready-made portfolio.

“These off-the-shelf investment products provided by investment platforms allow DIY investors to rely on experts to build a diversified portfolio tailored to their level of risk with ongoing active monitoring.

“It means rather than spending time and effort picking out the right stocks, funds or investment trusts to build a coherent investment strategy for their child’s future, parents can rely on the expertise of an investment expert and let them do the hard work.”

Though be mindful, ready-made investment portfolios still put your capital at risk.

How much should I consider investing for my child?

How much you choose to invest per month or per year for your child will depend on a range of factors including your budget and disposable income.

The average annual subscription into Junior ISAs was £1,229 (in the 2020-2021 tax year), according to the latest figures, so for many families the annual tax-free child ISA limit is more than enough.

Regular drip-feeding of money, even modest amounts each month, into a stocks and shares JISA can lead to significant gains over time. That’s because compounding, where investment gains are ploughed back into the pot to buy more investments, can lead to bigger returns.

While some online brokers have a minimum £25 monthly investment into their JISA, others don’t impose a minimum payment, so you could invest just £5 or £10 a month, for example.

Will I pay tax on my child’s investments?

Any income or investment returns earned in a Junior ISA are free of tax. However, if you invest on behalf of a child outside a JISA then there could be tax implications.

That’s because interest, income or investment growth earned on money you have invested for your child is treated as your own investment return for tax purposes, once that interest, income or growth exceeds £100.

For larger investment sums it could be useful to seek independent financial advice. You could consider a ‘bare trust’, which would enable you to invest in a tax-efficient way on behalf of a child, while retaining control over the assets.

There is no maximum limit to the funds you can put in a trust of this kind, but investors need to be aware tax law and regulations are subject to scrutiny and can change.

What fees will I pay on my child’s investments?

If you invest in a stocks and shares JISA for your child there are likely to be investment fees attached to the account. These will vary depending on the provider and investment platform you use, but they can add up over time.

JISA funds typically incur platform fees (typically around 0.25%) and potentially other fund charges on top, although in some cases, providers won’t charge a platform fee on JISAs (this is often the case if the parent has an existing ISA or trading account on the same platform, for example).

It’s important to regularly review your JISA provider and its fees to ensure you’re still getting value for money and profits are not being eroded too far. JISA money can be switched to a new provider, but if you are switching between investment JISAs you must transfer the full amount. Partial transfers are not allowed because a child can’t have two accounts of the same type at any time (more on JISA transfers in FAQs below).

What happens to my child’s investment when they reach 18?

Money invested in a Junior ISA can be accessed by the child from the age of 18. This means at this age they can legally take ownership of the money. It can be switched to a full cash or stocks and shares ISA (adults can save and invest up to £20,000 per tax year in ISAs tax free).

But it also means a child is free to withdraw and spend the funds from age 18.

It is something parents need to consider carefully when opening and investing in a JISA, as Haine at Bestinvest points out: “An alternative is to use your own ISA allowance – or part of it – provided you don’t need that for your own savings. That way you can decide what the pot can be used for, such as covering university costs or driving lessons, rather than giving an 18-year-old a lump sum.”