Skip Header

All you need to know about investing for children

Emma-Lou Montgomery

Emma-Lou Montgomery - Fidelity Personal Investing

Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest. Tax treatment depends on individual circumstances and all tax rules may change in the future.

In this article:

Whatever hopes and dreams you have for little Johnny or Jemima, it’s reassuring to know that you can help make them happen by setting your child or grandchild on the path to financial security when they are young.

Whether you want to help them buy their first car, contribute to their first home or even set them up for a comfortable retirement, knowing how to make the most of the child-friendly savings vehicles available to you can make the journey much easier.

Forget fairy-tales, here are all the facts you need when it comes to investing for your child or grandchild.

The beauty of investing for a child is that they have time on their side and that means that if you start them investing when they are young, their investments also have all the time they need to grow as well. The figures consistently show that for medium to long-term investors, the stock market will get your money working harder. And that’s especially so if you reinvest the dividends you earn along the way.

Take an 18-year-old today whose parents or grandparents made a one-off £1,000 investment when they were born. If that was invested in the FTSE All-Share, with standard charges applied that would now be worth £2,259.1 Please remember past performance is not a reliable indicator of future returns.

And just £50 a month from birth invested in the same way would have turned their total £10,800 investment over 18 years into £15,780 by the time the child reached adulthood.2

How do I invest for my child or grandchild?

Junior ISAs (JISA), which replaced Child Trust Funds in 2011, have proved to be increasingly popular among parents and grandparents wanting to kick-start their children’s saving habit. According to the latest figures from HMRC, some 907,000 Junior ISAs were opened in the 2017-18 tax year; more than three times the 296,000 opened in 2012.3

They have been available since 1 November 2011 to children under the age of 18 who do not hold a Child Trust Fund account (available to eligible children born on or between 1 September 2002 and 2 January 2011).

And they are popular for good reason. Whether you want them to have a pot of money for university, to put towards their first home or to help pay for their wedding, a Junior ISA (JISA) is an ideal way to start them on the path to being a smart saver. Designed for children, it’s a flexible and tax-efficient way to help them save with no income or capital gains tax payable on any returns.

Currently every eligible child in the UK under the age of 16 has an annual Junior ISA allowance of £9,000 a year which their parents, grandparents and friends and family can save into. The money can be saved in a cash ISA or invested in a stocks and shares ISA. Or both.

A Junior ISA is unlike an adult ISA, in that, if you wanted to, you could open an ISA with a different provider every year, potentially leaving you with the task of managing multiple ISA accounts. A child can only have one Junior ISA in their name.

The money invested in a Junior ISA cannot be accessed until a child reaches the age of 18, at which point the money will become theirs. Up until that point an adult, usually a parent, will act as trustee. That is not as formal as it sounds though and doesn’t come with any additional responsibilities, other than handling paperwork or the online account linked to the Junior ISA.

The beauty of a Junior ISA, aside from the tax-efficiency it offers, and the fact that the money is locked away out of temptation’s reach, is that anyone can contribute to a child’s Junior ISA.

So, as well as you being able to save into the Junior ISA for your child, friends and family can contribute too. Christmas and birthday money can all be added over the years, as long as the total amount saved in any year is within the annual tax-free limit.

Start your child’s Junior ISA today

Watch one young family’s story

Meet Abby, Sam and their daughter Una as they discuss how they manage their money and the challenges they face saving for the future

Who can invest in a Junior ISA?

Grandparents, aunts, uncles, godparents and anyone else who wishes to can contribute to your child’s Junior ISA, up to the annual £9,000 limit.

Children can open a cash as well as a stocks and shares account and according to the latest figures from HMRC, of the £902 million that was subscribed to Junior ISA accounts in 2017-18, around 57% was in cash. However, given the time-scale and the better potential returns for stock market investments to beat cash over the long-term, investments are better channelled into a stock market invested Junior ISA.

The ability to grow their savings, free from tax is the reason why Junior ISAs are a great way to save for a child’s future.

Do kids even pay tax?

Contrary to popular belief, children are liable for income tax, although few are fortunate enough to earn enough on their savings and investments to actually pay any.

So if you invest outside an ISA there will be tax to pay by your child if they earn above their personal allowance. The basic personal allowance is currently £12,500, so there won’t be any tax to pay as long as all the interest they earn does not come to more than £12,500 in the current tax year.

As a parent it is also worth bearing in mind that the rules are tougher still if the interest is earned on money given by you. If your child earns more than £100 in interest in any tax year from money you have given them, then you will find that you are personally liable for tax on the interest earned, if it’s above your personal allowance, which is just like your child’s £12,500 in the current tax year In which case you will pay tax on it at the basic rate, higher or top rate of tax, whichever applies to you.

The good news for grandparents, aunts, uncles, godparents and anyone else who gives money to a child, is that the same tax liability does not apply.

And of course, this only applies outside an ISA. If you invest within an ISA for your child or grandchild you do not have to worry about tax, and can let the ISA pot grow, in the knowledge that your child or grandchild won’t pay a penny of tax on money earned within their Junior ISA.

What happens with a Junior ISA when they reach 18?

When your child reaches the age of 18, the Junior ISA is automatically converted into a regular ISA, so your now fully-fledged adult son or daughter can take control and access the money or continue saving tax-efficiently for whatever they may need – whether that is a car, the deposit for their first home or the money for more day-to-day expenses, such as living costs at university.

Did you know 16-18 year olds have the biggest tax-free allowance of anyone?

One less widely-known perk of holding a Junior ISA is that between the ages of 16 and 18 your teenage child can also open a regular cash ISA and contribute to that, in addition to whatever has been added to their Junior ISA over those two years. That gives them the unique ability to save an additional £20,000 in the 2020/21 tax year; giving them a bigger tax-free savings allowance than any other group - with a total allowance of £29,000.

Check out our podcast on saving and investing for children

Giving your offspring a financial head-start in life is a common aim for parents but the choice of where and how to do that can be confusing.

In this podcast we hope we can arm you with all the knowledge you’ll need - and give you some encouragement along the way to build not only savings for you child - but a savings habit that will support them all the way through their life.

How do I stop them blowing the lot at 18?

The thought of your newly-fledged adult child running off into the sunset at the age of 18 with potentially tens or even hundreds of thousands of pounds in their pocket, is enough to bring every parent out in a cold sweat.

What if all those years of saving and investing end up getting blown on a motorbike/a year out/something totally inappropriate and not the educational/property buying/training purposes you’ve had them earmarked for in your mind for the past 18 or so years?

If you have a willful 18-year-old on your hands, then you might find yourself fighting a losing battle. So if you want to pre-empt that and retain some control over what the money is spent on, then saving into your own ISA and ear-marking it for your child’s future, is a good idea.

With a £20,000 annual allowance in the current tax year, that’s a tidy sum you can accrue and have at your disposal when it comes to helping out with university costs, as a step-up onto the property ladder, or just being able to step in when they come tapping (as they invariably will) at the doors of the Bank of Mum & Dad.

Retaining some flexibility by also investing in your ISA means you can save tax-efficiently for other pre-18 child costs too that might come up, such as school fees, driving lessons and so on. Each eligible adult can save up to £20,000 so two parents can save efficiently and build up a substantial sum to cover costs that may come along. And if there’s any money left over, you might even be able to treat yourselves. Win win!

How do I get my child to develop good savings habits?

Making a point of talking about your child’s savings and investments with them from as early an age as you can, getting them involved and showing them how it’s growing nicely over the years is a good way to instill a savings habit in them that will, hopefully, pay off.

Encouraging them to do this with a specific goal in mind is a great way to incentivise saving. And what better incentive than saving for their first car, first property or whatever else they have on their ‘most wanted’ list. Encourage your child to start saving into an ISA as soon as early as possible. The longer they have to save, the longer their money has to grow.

Opting to invest a regular monthly sum makes saving achievable for even the most cash-strapped of youngsters. They can save as little as £50 a month into their Junior stocks and shares ISA and choose where the money is invested, while still being able to add lump sums, where possible.

You can even start them on their investment journey, by getting them involved when it comes to choosing the funds they invest in. Our Select 50 range of funds covers all areas of investing from UK and international equities and bonds to gold and property, enabling them to take an active interest in where and how their money is invested. Or make it simpler still by investing in our Select 50 Balanced Fund and getting access to the ‘best of the best’ of the Select 50 range in one simple fund.

Can I plan further ahead and set up a pension for my child or grandchild?

Yes, you can. Starting a pension for a child is a smart move and according to HM Revenue & Customs data, about 60,000 under-18s already have pension plans in place.4

You can start saving into a Junior SIPP as soon as your child or grandchild is born. Each child can have a total of £3,600 a year, or £300 a month, saved into a pension.

Just as with your pension, the government automatically tops up payments you make by 20%, so for your child to have the maximum £3,600 a year, total contributions only need to come to £2,880.

Calculations show that if you were to invest £300 a month into a SIPP just for the first 18 years of their life without them adding another penny to it when they were old enough to, assuming 5% growth and 1.5% in charges, they would have an impressive £435,722 pension pot at the age of 65.5 Please note this is just an example for illustrative purposes. Growth in the stockmarket is never guaranteed.

Compare that to the estimated £304,596 they would have, based on the same growth assumptions, if they were to start paying into their own pension from the age of 25, and it’s easy to see why you may want to start a pension for a child.6

Of course, it’s pretty much inevitable that tax rules and reliefs will change between now and your child’s retirement, and you have to factor in inflation, which will erode the spending power of any money built up in the pension, but you cannot doubt that this is the ultimate way to make sure your child has the makings of a secure financial future – even though you won’t be there to see it.

Source:

1,2 Fidelity International, as at 30 June 2020, investments made into the FTSE All-Share, assuming platform service fee of 0.35% and annual management charge of 0.95%

3,4 Individual Savings Account (ISA) Statistics, June 2020

5,6 Fidelity International, June 2020

Five year performance

(%) As at 30 June 2015-2016 2016-2017 2017-2018 2018-2019 2019-2020
FTSE All-Share 2.2 18.1 1.9 0.6 -13.0

Past performance is not a reliable indicator of future returns

Source: Refinitiv, total returns as at 30.6.20.

Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. Tax treatment depends on individual circumstances and all tax rules may change in the future. Withdrawals from a pension product will not be possible until you reach age 55. Withdrawals from a Junior ISA will not be possible until the child reaches age 18. Junior ISAs are long term tax-efficient savings accounts for children. A Junior ISA is only available to children under the age of 18 who are resident in the UK. It is not possible to hold both a Junior ISA and a Child Trust Fund (CTF). If your child was born between 1 September 2002 and 2 January 2011 the Government would have automatically opened a CTF on your child’s behalf. If your child holds a CTF they can transfer the investment into a Junior ISA. Please note that Fidelity does not allow for CTF transfers into a Junior ISA. Parents or guardians can open the Junior ISA and manage the account but the money belongs to the child and the investment is locked away until the child reaches 18 years old. Select 50 is not a personal recommendation to buy or sell a fund. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.

What you could do next

Start saving for your child’s future

Save money for your child, free from income tax or capital gains tax on any returns.

Start looking after future you, today

Take control of your retirement savings and get your money working harder with the Fidelity SIPP

View our experts' favourite funds

Our experts research thousands of funds a year. The Fidelity Select 50 is a list of their favourites.

Latest articles

How do you spot a corporate con?

Three key factors investors should consider


Dhananjay Phadnis

Dhananjay Phadnis

Portfolio Manager

UK recession: how to protect your investments

The worst GDP report ever need not derail your portfolio


Tom Stevenson

Tom Stevenson

Investment Director

What happens to my pension if I get made redundant?

Four important tips if you’re facing financial uncertainty


Maike Currie

Maike Currie

Fidelity Personal Investing