I don’t have kids myself but I’ve noticed that some people do, and even more people are thinking of getting some. The masochists.
I’ve also noticed that people like their kids. A lot. They want to protect them from future harm.
And what better way to do that than to invest on their behalf from the moment the ink dries on the birth certificate?
Hey, this is a site about investing – this is how we show the love!
Besides, even I have two wonderful nieces, and I recently scoured the market to find the best Junior ISA (JISA) deal for them.
Setting pressie money to work towards their future seems like a much better gift than adding to the mound of colourful plastic tat that already surrounds them. More toys isn’t what they need.
Rather, a dollop of assets that can compound for decades and buffer them against a retreating State and the competing future pressures of university fees, mortgages, and pension contributions is giving them something they will be thankful for – even though I might not immediately see a smile on their little faces.
The question is how to invest for children to deliver the biggest bang for your bucks?
Asset allocation
A friend of mine invested in a cautious fund for their newborn because an IFA explained that certain investments are risky while others are as gentle as Bagpuss. The last thing my friend wanted to do was risk her child’s future on a moonshot, so she went cautious: 40% equities, 60% bonds.
That sounds sensible, but it’s equities that typically drive returns, not bonds. Over multiple decades, portfolios that favour equities are most likely to deliver stronger results.
UK data is hard to come by, but in the US equities have beaten bonds 95% of the time over 20 year periods, and 99% of the time over 30 years.
The little darlings can afford to play a waiting game. Their risk tolerance is extremely high because you’re going to be providing life’s essentials for at least the first 20 years (and for much if not all of that time they won’t know or care about the stock market, anyway).
They’ll then enter the labour force and have decades of earnings ahead of them.
In other words, they are rich in human capital. They’ve got plenty of time to ride out a poor run for equities and to wait for them to come good.
For my nieces, I’ve gone for a 100% equity allocation. The expected returns are higher and they can ignore the volatility.
Still you could sensibly decide that history doesn’t guarantee the future and you’d rather the portfolio was better diversified with, say, a 20% allocation to bonds.
Also, if your chosen investment option means that your child will take over the account in 18 years or thereabouts, then you could gradually de-risk it if you start from a very adventurous equity position.
The simplest, cheapest option is to use a low cost, global passive vehicle like one of Vanguard’s LifeStrategy funds.
Such a fund is hugely diversified across global markets, is low maintenance, and automatically rebalances between asset classes.
Platform
You can manage the child’s investment yourself using a DIY online investing platform. Our broker comparison table will guide you through the options.
The cheapest brokers for adults are worth looking at for the best kids’ deals, too.
- If you plan to make regular contributions, say monthly, and the fund is likely to remain below £32,000 for a long time, then look at Cavendish Online or Charles Stanley Direct.
- If you’re contributing regularly but operating above the £32,000 threshold, then check out iWeb and Interactive Investor.
It’s all about keeping your costs low so that your child’s fund benefits, as opposed to lining the pockets of the finance industry. A few quick calculations will show you why.
Now let’s look at how to invest for children in the most appropriate investing vehicles available.
Junior ISA (JISA)
You can contribute up to £9,000 annually on behalf of your child into a JISA.
This works very much like an adult ISA:
- Available in cash and stocks and shares flavours.
- Contributions grow free from income tax and capital gains tax.
The differences are:
- Mini-you can withdraw the money on their 18th birthday.
- If the JISA survives that existential threat, then it metamorphoses into an adult ISA.
- 16-17 year-old Young Apprentice types can take over the management of their JISA and put up to £20,000 of their own money into it, on top of your piffling four grand.
- A parent or guardian opens the account, but the child owns the money.
Children born after 3 January 2011 or those aged under 18 and without a Child Trust Fund (CTF) can have a Junior ISA.
From April 2015, kiddiewinks who have a CTF can transfer it into a JISA.
CTFs are the forerunners of JISAs and are similar in the way that the Teletubbies aren’t a million miles from In The Night Garden.
The klaxon-blaring feature of both JISAs and CTFs is that your offspring can do whatever they like with the money from the age of 18.
If you’re at all worried that you may be creating the mother of all booze funds then you have some longer-term options for retaining control.
Your ISA
With today’s more generous allowances, there might be enough room in your ISA to tuck away a fund or a portion of one for the little guys.
The tax breaks remain the same but the assets are under your command. You can decide when to pay out the proceeds, or use them to maintain discipline, emotional blackmail – whatever.
The downside is that the money will lose its tax shielding once it leaves your ISA. You may also need to make legal provision to ensure the money is used as you intended in the event of death or divorce.
Child pensions
This one always makes me chuckle because it seems so absurd. Sadly though, today’s bonny babies will one day be washed-up wrinklies wise old birds.
Your children will, in all likelihood, need a retirement plan. And given our looming pension crises, worsening demographics, and the hard-wired inability to think ahead, you can scarcely choose a wiser gift than planting an acorn which will grow into a sturdy oak of a pension many years hence.
Even today, you can’t access your pension until age 55. By the time a newborn grows up the minimum age for withdrawal will probably be sixty-something.
Most likely they’ll have calmed down by then.
Chances are they’ll be toasting your 90th birthday and thanking you for the foresight that enabled them to benefit from the amazing potential of six decades of compounding equity returns.
That’s the vision, anyway. The concrete steps:
- Open a stakeholder pension or Child SIPP.
- Every £80 you put in is topped up to £100 by the Government’s 20% tax relief.
- Put in £2,880 per year to benefit from max tax relief and to hit the gross annual investment limit of £3,600.
- Anyone can contribute up to the £2,880 net maximum.
Take a look at Cavendish Online and Best Invest as platforms.
Put in £2,880 per year for the first 18 years, leave to compound until age 65 (assuming a 5% real return and 20% tax relief), and junior will be a millionaire.
Of course a million pounds won’t be worth a million by then but every little helps.
Junior investment accounts
A junior investment account is a taxable account that may be intended for a child but is held in your name.
In other words, you retain control for as long you like.
The tax situation is odd:
- If one parent contributes then the account is taxed on interest and dividends earned above £100 per year at that parent’s tax rate.
- If both parent’s contribute then the account can earn £200 income before being taxed at the highest earner’s rate.
- So if the contributors fall into the 20% income tax bracket then there won’t be any deduction from dividends because the requisite amount is already sheared off.
- Contributions from anyone else – including grandparents and other relatives – are not subject to the above restrictions.
In the latter instance, it’s the bairn’s tax rate that counts. They have a £12,500 personal allowance, like anyone else, so the tax bill is likely to be light unless you’ve sired a young Rockefeller.
Similarly, baby’s capital gains allowance of £12,300 per year should be enough to cope with most growth scenarios – and if it isn’t then they’re laughing anyway.
You could place this type of account or other assets into a trust. I’m not going to get into that subject here, but HMRC have kindly rustled up some guidance for beginners.
Inheritance tax and gifting
Reducing inheritance tax (IHT) is a strong motive to sock away some money for the next generation sooner rather than later.
You can give away annually:
- Up to £3,000, known as the annual gift exemption (Plus a roll over from the previous year if you didn’t bestow the full amount).
- Up to £250 as a small gift to any number of people who didn’t benefit from your £3,000 giveaway. If you give somebody more than £250 then the exemption is lost from their whole gift.
- You can make IHT exempt regular payments (e.g. monthly savings contributions, birthdays, Christmas) as long as you have enough income left over to maintain your normal lifestyle. Sounds woolly? Very, but you can read more about it over on HMRC’s IHT pages.
- Any giveaways beyond the above will avoid inheritance tax if you manage to hang on for seven years after the gift date. Die before then though and, quite apart from upsetting everyone, you’ll potentially land them with an IHT tax bill. Selfish.
NS&I Children’s Bonds and Friendly Societies
If that all sounds a bit racy then you can invest tax-free in some cuddly Children’s Bonds from the Treasury backed NS&I.
- This is a fixed interest 5-year savings bond.
- Parents, guardians, grandparents and even great-grand parents can pitch in.
- You can contribute £25 to £3,000 per child per issue.
- Interest is tax-free.
- Capital is 100% secure because NS&I is an arm of the UK Treasury.
- You can roll over the bonds every five years.
- The rugrat takes over at age 16.
You can also invest between £100 and £30,000 in premium bonds that handover when the nipper makes 18.
For completion’s sake, and just in case you’ve got any money left, you could look up Friendly Society tax-exempt plans. You can only pay in up to £300 a year but the investment can run tax-free for 25 years and is run by a Mutual.
How to invest for children with silly parents
Funnily enough, the only resistance I ran into when investing for my nieces was from adults who thought it was a little cold to deny the kids the instant gratification of unwrapping a pressie.
But actually, I think the only people who are reluctant to give up their kicks are adults who enjoy a little bribery.
My eldest niece totally understands saving and is well able to visualise the money as her ticket to a proper toy like her first car.
Most kids don’t suffer from a shortage of instant gratification. So it makes sense to put your money towards something that will make a real difference when life gets a little tougher.
“Time for bed,” said Zebedee
“Take it steady”, said The Accumulator
Comments on this entry are closed.
Investing for children is like catnip for spreadsheet junkies
“Oh look invest £12,000 when a child is born and it will have a million pounds in its pension when its 65”
“Hey, this is a site about investing – this is how we show the love!” Haha it’s what we do.
I’ve had similar resistance when trying to buy some investments for a nephews birthday. It’s seems some more plastic tat is what they need. Shhhh don’t tell anyone. I invested on his behalf anyway
Question for those more knowledgeable than I:
Do contributions into a JISA or Child Pension count towards your allowance for annual gift exemption?
Junior ISA = good idea but as mentioned the child may possibly spend the money when they reach 18 instead of re-investing wisely.
Investment savings plan = not too bad, we recently set one up for our youngest child these can be from as little as £10 per month for e.g. a tracker fund, I’m unsure if I’m allowed to naMe & Give pointers to the company who provides this. Grandparents and other relatives can contribute into these plans to avoid the amounts that might be tax liable. Set up the account using both parents as mentioned in the article.
Investing for children can be quite confusing as there’s a trade-off between control, taxation and the vehicles that can be used.
Watch out for fees
Hi there, thanks for this useful summary. I’m a bit confused by what you describe as ‘junior savings accounts’ which I presume are taxable accounts held in the name of the child, in other words essentially a bare trust arrangements (as is the case for e.g. children’s bank accounts).
It would be useful if you could indicate which of the cheap brokers provide such accounts and an indication of the cost – probably too much work to add to the big table but I know that Alliance Trust Savings provide these accounts (for a flat rate fee of around £10 per quarter) as to Hargreaves Lansdown (for their usual percentage fee). Some definitely don’t though.
Thanks for a really informative article 🙂
Something also worth noting for one-off investments is that fees for a particular platform can change quite significantly over time.
e.g. imagine investing a one-off £200 in an HSBC index tracker a few years ago with Hargreaves Lansdown.
Initially there would have been no platform fees (hooray!). Then fees were increased to £2 per month / £24 per annum (which would eat 12% off that initial investment). At this point your money/assets can potentially be locked in to a vehicle (JISA, CTF, Pension etc) with significant fees required to transfer away (£25 or 12.5%) to a different platform. *
I feel more comfortable making small investments for children within my own ISA (which unfortunately I’m not in the position to fill every year). If any of the amounts ever grow significantly, I’ll re-evaluate this.
* I realise the current HL model would be more favorable. My point/worry is getting locked into something that ends up eating away at the initial capital invested.
Thanks for the article. Monevator, Escape Artist, MMM et al have been fairly revelatory to me over the past few months. Stuff that I had previously vaguely intuited is being fully articulated by this community, and in my view topics such as these deserve a much wider audience. They are powerful ideas that can vastly improve personal happiness and freedom.
My grandad who is in in his mid 90s, will be leaving my four year old daughter a lump sum. This will go into a SIPP I have set up for her. For me its an interesting thought that money that could have originally flowed into the family in the late 19th/early 20th century could conceivably help to make her old age a comfortable one in the the 22nd and still allow her to pass on the principle to future generations.
So it appears ( without going into trusts) that to maintain control of the investment and not lock it up till their 65 then a junior investment account seems to be the way to go?
On the tax front what’s the real world impact of this not being an isa or sipp. Ie assume adding £1500 per year, would this fair much worse than an isa if the dividends or growth is taxed, does this add up over 18 years with compounding to realise a substantialy smaller pot of money than a jisa?
Also does the investment account mean you can add and remove money and spend it as you wish if you wanted\ needed to?
Lastly does this mean having to fill out an end of year tax return yourself?
Cheers!
So, what were the best Junior ISA’s that you found then?
Great article.
Personally, I’ve gone the JISA route. It’s free to bolt on a JISA onto my existing Interactive Investor ISA/SIPP and £1.50 to invest in any share/fund/ETF through the regular investment programme.
Only downside is the £1.50’s can’t come out of the existing commission credit that III give, but still a pretty cheap set-up when I’m investing the £4k in a couple of lumps (Christmas & Birthday) into VLS 100%. £3 a year isn’t too shabby!
I’ve just had a gander at the iWeb website and can’t find mention of a JISA anywhere. Are you sure about this? The Moneywise website likewise says that iWeb doesn’t offer a JISA.
M & G offer a JISA and you can use any of their funds I think. I pay into their UK Index fund but the overall fees are about 0.5% I think. This was transferred from an investment savings plan so I just kept investing into the same fund.
I do love the wry humour of the x-axis 😉
I have funds in my own ISA for my two nephews and niece – I couldn’t open JISAs for them because by the time JISAs came out in 2011, the little sprogs were no longer resident in the UK.
I just keep the funds I’ve invested for them separate from my own on a spreadsheet and plan on handing the cash over when they turn 21 (in 14-16 years’ time).
Hopefully, they will be smart enough to save some of it!
Eloquently put @bluecactus, Your second paragraph sums up everything beautifully.
And yes @Neverland this is spreadsheet porn.
Quick question Mr Accumulator; Am I missing something but are you not contradicting yourself by talking about a real return millionaire in one sentence and then a million pounds not being worth as much in the future in the next sentence?
Another interesting option for IHT planning (post April 2015) is the idea of Pension Pots being handed down from one generation to the next (or skipping a generation…) as per this comment by Rob Morgan of Charles Stanley Direct and I quote:
Inheritance tax (IHT) potentially applies on death
if your estate is worth more than £325,000 (for
tax year 2014/15) or up to £650,000 if you inherit
your spouse’s unused allowance. Any excess
over the allowance is usually taxed at 40% when
passed on.
As the IHT allowance includes the value of all assets,
including your home, it affects a large number of people,
but in many cases it is possible to reduce the effects by
planning ahead. Pensions are generally outside a person’s
estate for IHT purposes, but currently if an investor has
already started drawing income, or is over 75, on death
the pot is subject to a special tax of 55%.
If the proposed legislation is confirmed, and a pension
fund can be passed to any nominated beneficiary free from
tax, it opens up significant opportunities for inheritance tax
planning. Assets held in a pension could potentially pass
through generations of a family with no tax to be paid
@Earlyretirementguy : any gifts that you make to a JISA or Pension scheme for your child are still a gift for Inheritance Tax purposes, and do therefore count towards the annual exemption of £3,000. There are a few points to bear in mind here though – if you are making these contributions on a regular basis from your income (i.e. they don’t diminish your capital), they will be exempt as ‘Normal expenditure out of income’, as mentioned above. Secondly, the pension limit for children is £2,880, just below the £3,000 exemption, so this is only an issue if there are more children than contributing married parents. And thirdly, any gifts that aren’t immediately exempt will become exempt if you survive the gift by 7 years. So you could stop contributing once they become self-sufficient, and make sure experience 7 years of their grafting.
Hope that helps.
I’m not at all sure the suggestion you can use iWeb for a junior USA is correct
After a bit of research myself I found that youinvest seemed a reasonable option. Not bad if you hold shares and use the cheap regular purchase otion
my conclusion for the most cost effective JISA with a fund only portfolio was Charles Stanley Direct – no dealing charges and 0.2% (iirc) platform fee. For the children’s pensions I went for an Aviva stakeholder via Cavendish online. My kids also have taxable accounts resulting from an inheritance, these are with ATS, not sure if that is the most cost effective as they were set up some time ago when the choice of brokers offering Vanguard funds was much more limited. I’m glad I didn’t go for HL, which was the other option at the time, as it would have become pretty expensive!
What is the view on using F&C Foreign and Colonial Investment Trust and F&C for a CTF/ISA or pension for child investments. Would people look upon this as a better option than Vanguard and/or Index funds. Would welcome people’s views. Currently using IT for daughters CTF with F&C and VLS 60% in a Child SIPP.
possibly a JISA tick-box column on the old broker comparison table? could be quite a handy addition..
@The Taxman Cometh. Even if treated as gift I presume it wont be taxable as minimum taxable income limit will apply?
Unless the child has other sources of income which take it above £10,000.
@rajkanwarbatra : from the child’s perspective, it isn’t taxable income. Any income arising on the funds post-gift would be tax-free within the JISA or pension wrapper, so no income tax consequences to worry about. As mentioned in the main article, if it’s not within either wrapper, then where any income arising on the funds gifted exceeds £100 in a tax year, the excess is taxed as the contributing parent’s income.
The CTF provider I have my daughter’s money with (Family Investments) offers no control whatsoever over investment mix. It’s about 90%/10% Stocks/Bonds. With 7 years to go ’til my daughter needs the money, that’s far to risky. Bring on April 2105…
The “family” set up at Interactive Investor is pretty good: Mrs LCIL & I have linked ISA’s so share a combined cost of £20/quarter, & the kids get free of charge JISA’s. Monthly trading keeps trading costs minimal at the aforementioned £1..50/trade.
One of the cheapest JISAs I’m aware of is the x-o JISA, but only if you’re happy with no-frills stocks (i.e. you can’t buy funds). 5.95 purchase & sales and no admin fees. Otherwise as stated above, YouInvest is probably best for funds as the 0.2% fund fee is better than most. Shame iWeb don’t seem do them, as their n0 fund fee is a winner.
Thanks for a good article – I hadn’t considered the Pension aspect – certainly seems worthwhile if any extra cash left after the JISA.
I’m not sure of the benefits of a child pension unless you have hit an annual/lifetime allowance. You may do better from higher tax relief on additional contributions to your own pension. If you work on the theory that most of your wealth will pass to your children eventually, there’s no advantage offered by a child pension. Perhaps somebody who has gone down this route could shed some light on the reasons?
@ J.L.
Daughter has CTF account with F&C invested in FRCL. Also has SIPP invested in VGLS 80% Acc fund. Basically investing child benefit monies received each month which get boosted by a further £20 per month resulting in a gross monthly investment of £100. Hopefully reasonable fund at age 18/21 which she can then contribute to as I doubt her generation will have advantage of either work or state pensions and auto enrolment pension too inflexible at this time.
maybe bear in mind with youinvest, if you’re happy to buy on the 10th of the month, then the securities trading fee can be had for £1.50.
I have a ctf with selftrade – goodness only knows whats going on there, but it is still on the old funds are ‘free’ setup for now (i.e. like HL two or three years ago) i imagine that will cease when equiniti sort it all out
i have a jisa with youinvest, and this is my first foray into an etf only portfolio (for a lower cost alternative to my traditional approach of using funds)
i can’t bring myself to open any junior sipps – something about the psychology of it prevents me from bothering. I think whether I would have liked my parents to do the same and I think the answer is probably no.. but i was pretty glad of the savings they had put aside for me when i was in my early twenties
Can you do a similar article on investing for Grandchildren. I am told the best option is to create a discretionary trust with children/grandchildren as beneficiaries and make investments regularly out of income, annual gifts or lump sums with the 7yr IHT rules.
I have a non trust investment in Vanguard 100% lifestyle fund but need to think about getting this and more into a trust. I also have a US citizen grandchild and been advised that the trust MUST be US based and accessible at 25 (a much better age) as a UK trust is not tax efficient and penalised by the US.
JISA’s being reserved for parents.
Perhaps Greybeard might look into this for us older folks
Re: iWeb – my nieces have JISAs with iWeb. So either iWeb have withdrawn them for new customers or buried them somewhere. I suggest emailing them directly to check as their website is not the best.
@ Gally – all the options above apply for grandparents. JISAs have to be opened by a parent or guardian (and I guess pensions too) but other than that there’s nothing to stop you from contributing.
I’ve just given them a bell (iWeb) and they don’t provide junior isas
I agree with JL on using my your own pension allowances rather than your children’s. I’m a 40% tax payer so get increased tax savings on the contributions, and am not hitting the 40k a year contribution limit. And will hopefully be about retired by the time they reach adulthood
I’m also going to do a small amount of bare trust savings each month rather than JISA. This has the advantage that it is possible for the trustees to access it before 18 if necessary – e.g. extra tuition or medical expenses. There won’t be huge amounts there, and it will be withdrawable using CGT allowances. I may use JISAs for one off contributions.
I’ve deleted the iWeb reference based on Rhino’s update.
Whats the practical implication of capital gains and tax on the junior investment account? By this I mean would I need to start doing tax returns each year for myself or the child?
Would I have to re balance or sell and rebuy 5/10 years down the line to make sure its under the cap gains limit, do I have to keep records of the monthly investing to do this?
If the child account is held in my name, what implications does this have for when giving the money to the child at whatever time? Do you have to bear in mind gifting rules etc?
For example if the portfolio was say worth 40k/ 60k by 25th/30th b day could i just hand that over for house deposit with no further deductions?
Isn’t the greatest danger here that they take the money and run at 18.
Not sure that reason or logic will stand up to a holiday in the balearics? If it was released to them at 30 that would be more ideal…..
Going 100pct equity for young children is the way I invest as well. My kids have a part of my trackers with their name on it in the XLS with my portfolio. By the time they marry or move out, it should have compounded like hell.
We do not have specific accounts with tax advantage for them, luckily most brokers have some third party clause on their investment products. For now, that is what i use for my god child.
Great article (great site)! And very timely as we are considering options for our son who is 18 months. Based on the very useful comments, I wonder if the best option for us is to simply apportion part of our ISA and track it in a spreadsheet. As we are currently not able to max out our ISA this seems to make the most sense to me, but I would love to hear other views. Thanks
@ mr tnmk. Makes sense to me.
I didnt want to go the junior isa route or similar due to wanting to maintain control past 18. In the end i’ve opened a trading account with Charles Stanley direct and have a regular investing setup for Vanguard LS 100%. They don’t do anything like trust arrangements but have edited the account name to be mine then a/c “childs name” so i can keep track and keep it separate. Don’t think it has any tax shielding if I ever passed it onto my son but @ £100 a month its hardly going to pass my own cap gains threshold for quite some years! Not sure implications if I wanted to give the money to the boy, I could also purchase whatever it is for him using that money instead?
Didn’t want to get it mixed up in my own isa but if you don’t mind that then it makes most sense just purchase VLS 100% ACC or similar and that will keep itself separate if you don’t invest in that particular fund for yourself unless your thinking of a more complex approach!?
As per JL and Rivermouth, for higher rate taxpayers it makes far more sense to pay into their own pensions. Even the best JISA investor can’t match the 40% return the government gives you on your own pension.
If you’re 33 years old when your child is born, he or she will be 25 by the time you can start withdrawing from your pension. That’s around the same time that the child will start begging the Bank of Mum & Dad for a deposit on a £1bn flat in zone 9.