When it comes to planning for your children’s future, one of the most common questions parents ask is how best to invest for them. The right approach largely depends on your individual circumstances, but here’s a look at five of the most effective options for securing your children’s financial future.
1. Easy Access Savings Account for Children
For many parents, a children’s easy access savings account is one of the first things they consider. While these accounts offer flexibility and convenience, they’re not the best choice for long-term investing due to inflation. Over time, the value of the savings will likely erode unless the interest rates keep pace with inflation. However, if you’re saving for something short-term, such as an upcoming event or expense, this option can provide easy access to funds without penalties.
2. Premium Bonds
Premium bonds are often seen as a safe and exciting way to save, but they may not be as appealing as many think. A large proportion of holders, especially those with smaller amounts invested, won’t win anything at all. For instance, around 70% of people with up to £1,000 in premium bonds never win a prize. Even those who have £10,000 in premium bonds can expect a return of only about 0.75% per year, which is likely to fall short of inflation over time.
One of the attractions of premium bonds is the chance to win big—there’s a prize fund with the potential to win up to a million pounds. However, the odds of winning are quite low, often making them less effective as an investment strategy. Still, they can be fun and educational, especially for children, as they get a chance to engage with saving while imagining the excitement of winning a large prize.
3. Junior Pensions
Junior pensions are an excellent tool for long-term investment, especially when you’re aiming to outpace inflation. Contributions to a child’s pension benefit from 20% tax relief, which makes them even more powerful. For example, if you contribute £2,880 into your child’s pension, it will automatically increase to £3,600 due to the tax relief.
However, while junior pensions are a great option for securing your child’s future, they come with a few drawbacks. The money cannot be accessed until the child reaches retirement age, which means you won’t be able to use it for other needs, such as helping with a home deposit. Additionally, your child may become a high earner later in life, which could lead to complications with lifetime pension allowances. It’s important to consider these aspects carefully before making a decision.
4. Junior ISA (JISA)
The Junior ISA is one of the most popular choices for parents looking to invest for their children’s future. This account works similarly to a regular Stocks and Shares ISA but is specifically designed for children. The money grows tax-free, and while there is no tax relief on contributions, the annual contribution limit is £9,000.
Once the money is in the JISA, it remains locked until the child turns 18, at which point they can access the funds. For many parents, the fact that the money is out of reach until the child turns 18 is a plus, but some may prefer to have more control over when their child can access it. Nonetheless, this is a solid investment option for long-term savings.
5. Keeping the Money in Your Own Name
In some cases, parents may choose to keep the money in their own name and invest it for their children later. This strategy can be particularly effective if you have already maximized your own ISA allowances or taken full advantage of your capital gains tax allowance. It gives you flexibility and control over the money, allowing you to decide when and how to pass it on to your child.
Ultimately, if you’re unsure about which option to choose, working with a financial advisor can help you make the best decision based on your unique situation and goals.
In conclusion, there are several investment options to consider when saving for your child’s future, each with its own set of benefits and drawbacks. Whether you opt for a Junior ISA, a junior pension, or another approach, it’s important to evaluate your financial goals and consider your child’s future needs when making your decision.
