- Investing early significantly enhances long-term outcomes.
- Investment accounts offer a valuable opportunity to teach the next generation about money and investing.
- The cost of major life milestones for young people is rising; a nest egg can give them financial security and confidence.
Emma Wall, Chief Investment Strategist, Hargreaves Lansdown
“Want to give a child a real headstart in life? Start investing for them early. Putting money aside when your child is young means it will be left untouched for a long time – perfect for investing. It allows small, consistent contributions to grow into something meaningful.
It’s not just for parents to think about either. Grandparents, godparents, friends and family can all play a part in building a nest egg that could one day help fund life’s major milestones – whether it’s education, a first home, or laying the groundwork for the good life in retirement.
There are several ways to do it: a Junior ISA, Junior SIPP or Bare Trust – or even a mix of all three – but be aware, when the child turns 18 (16 for the Bare Trust in Scotland) they can take control of the money. These accounts are more than a nest egg – they create a way to start teaching young people about money and help them understand the world of investing.
You can start as young as you think they can grasp the concept – every child is different and making it relatable is key. Talk about companies they recognise, their favourite brand of chocolate, a gaming company they use, or a car manufacturer they admire.
And when they hit their teenage years? That’s when the lessons really matter. Equipping older children with financial know-how is one of the best forms of risk management, as it can help them avoid the latest Tik Tok meme stock or crypto craze, and crucially, show them how to spot a scam.
There are three accounts to consider:
- Junior ISA
Junior ISAs offer a valuable tax-free wrapper to families who want to save for their offspring. Once opened by a parent or legal guardian, anyone can contribute regularly, or as one-off gifts for birthdays and holidays.
You can invest up to £9,000 every tax year, and all interest and investment growth are free of UK income and capital gains tax. Money in a Junior ISA is normally locked away until the child reaches 18, so there’s plenty of time to ride the ups and downs of the stock market.
If you start when they’re tiny, the compound growth each year can result in a significant sum.
Our calculations show that investing the full £9,000 Junior ISA allowance each year from birth could produce a nest egg of around £260,000 by the time they turn 18, based on annual investment growth of 5%(excluding investment charges and inflation).
- Junior SIPP
A Junior SIPP allows you to start a retirement fund for a child. It may seem absurd to be thinking about retirement for someone who is still wearing nappies, but the maths is pretty compelling, thanks to tax relief coupled with tax-free investment growth, plus the added magic of compounding.
You can normally save up to £2,880 a year into a Junior SIPP, which is topped up to a maximum of £3,600 by the government in the form of basic rate tax relief of 20%. If you contributed the maximum each year from birth to age 18, the pot would be worth close to £100,000, assuming 5% investment growth a year. Left untouched, it could be close to a whopping £1,000,000 by the time your child turns 65. But if they continued to contribute throughout their working life, then the sky’s the limit. These calculations do not consider investment charges or inflation.
Junior SIPPs must be opened and managed by a parent or guardian, then control passes to the child when they turn 18, though they won’t normally be able to access the money until pension age (55 currently but rising to 57 in 2028). Like an ISA, other family members can contribute. For grandparents it could be a handy estate planning tool, because if they choose to use part of their £3,000 annual gifting allowance, then the contribution will be immediately exempt from inheritance tax.
- Bare Trust
Bare Trusts can be attractive for grandparents, who would like to be able to set up the account and control the investment decisions. With no limits on contributions, you can pay in as much as you like, and any tax usually falls upon the child, meaning there’s often little or no tax to pay. But there is an exception to this rule – if income generated from gifts from a parent exceeds £100 a year, any income is then taxed as the parent’s income and not the child’s.
The child is automatically entitled to what’s in the Bare Trust at 18; however, access before 18 is possible, provided the trustees demonstrate that the withdrawal is for the benefit of the child e.g. buying their first car, or school fees.
Bare Trusts can also support inheritance tax planning – by putting the money in trust, it often reduces the value of an estate, and in turn any inheritance tax bill that may need to be paid by loved ones in the future.”
