Any parent likes to think that the more you invest into your children, the better outcomes you can expect. This works for time, patience, love and many other factors. But it also works for another factor that is slightly less obvious – finance.

Investing FOR your children offers the chance to give your child a big financial boost when inevitably they become adults. University fees, first cars, gap years, even a deposit for a first house may feel like a lifetime away for your children, but starting saving and investing earlier gives you a big head start towards any and all of those milestones.

What are the best options to consider when investing for your child?

Junior ISAs

As simple and effective as normal ISAs, Junior ISAs are the number one investing tool for your children. The limit (as at 22/23 tax year) is £9,000 per child per year, which can go a long way.

ISAs are tax-free forever, which means all dividends, income and capital gains are not taxed.

Junior ISAs have a couple of unique characteristics you need to be aware of though:

Once the money goes into a Junior ISA, you cannot get it out until the child turns 18. So the idea of people raiding children’s Junior ISAs to fund house moves unfortunately doesn’t work.

The Junior ISAs will legally become a normal ISA on the child’s 18th birthday, which means they can do with it what they like.

I have heard many comments that parents don’t want their children getting access to all that money at age 18, for fear of them buying a Porsche and wrapping it around a tree. However, I have a different view. I think one of the best investments we can make for our children is educating them about finance.

I speak from personal experience.

My grandmother bought me some shares when I was about 14 years old. I still remember them – Macmahon Holdings – a small Australian engineering company and, for me, it started the journey of a lifetime. Every day I would look in the paper and track the ups and downs of those shares over time. To be honest, I think I have tracked share prices virtually every day of my life since then.

Starting that process though, taught me many things about investing and markets. It taught me that shares go up and down and how I need to embrace volatility for long-run gains. It taught me what dividends were and the benefits of compounding over time. It taught me that single company risk can be diversified away through a portfolio of investments, with the ultimate diversified portfolio being an index fund.

All of this I learned by experience and doing, both of which are much, much more effective learnings tools that simply trying to read a book, or worse, my parents trying to tell me!

Junior SIPPs

The next best option is a Junior Self-Invested Personal Pension (SIPP). A Junior SIPP is a very early pension for your child. Normal pension rules apply, in that the child, then adult, cannot access these funds before they turn 55. Once the child turns 18, like the ISA above, the Junior SIPP turns into a normal adult SIPP with all the same rules applying.

The unique aspect about Junior SIPPs are anyone can make contributions and each contribution will receive 20% tax relief. The maximum amount that can be invested each year into a Junior SIPP is £2,880 – which then becomes £3,600 with the 20% tax relief applied.

The other very attractive factor to consider with Junior SIPPs is the benefit of what Albert Einstein called the eighth wonder of the world – compounding.

As an example, if you contributed the maximum £2,880 per year to a child’s Junior SIPP for the first 18 years of their life, then simply left the money alone in an investment earning 5% per year, by the time the child turns 65, that pension pot is worth over £1m. If the pot grows at 7%, which is more typical, but still below the long-term average of major stock indices like the FTSE 100 or the S&P 500, then the pot is worth over £3m!

Premium Bonds

The final option is not exactly an investment, its more of a savings account. And to be honest, I’m not much of a fan.

Premium Bonds have been part of the UK personal finance landscape for decades and they tend to retain their popularity through the idea that people may “win” the £1m bonus that they apparently pay out. I’m sure they do, but I’ve never heard of anyone actually winning the £1m. The most I’ve ever heard anyone get from Premium Bonds is a prize of £500. And that was just one person once.

For those that don’t know, Premium Bonds are a savings-type account that doesn’t pay interest, but runs random prize draws every month and pays out “prizes” ranging from £25 up to £1m. There are plenty of £25 prizes offered but only 1x £1m draw. The overall average savings rate apparently is 2.2% – however remember this is where the law of averages starts to hurt. Yes, the average may be 2.2% but that includes the 1 x £1m prize draw which obviously only one person wins. If you take that out, and most people clearly will not win the £1m, then the average savings rate is lower.

Also consider the compounding as well. Unless you choose to re-invest the prizes, you don’t get any compounding benefit either. The one benefit around Premium Bonds are the prizes paid out are tax-free.

There you have it. The three most popular investment vehicles for children.

Should you need any help or have questions, please get in touch and we will be happy to have a conversation.