3rd May 2023

Investing for Your Children’s Future: Navigating Savings Accounts, Premium Bonds and Beyond

Investing in your children’s future can be a daunting task. As a new parent, there are often lots of demands on your wallet and time, and considering which investment product to choose may be some way down the list of your priorities.  With so many options available, it’s essential to make informed decisions to ensure you provide the best opportunities for their financial well-being. In this piece, we shall explore various investment options, including savings accounts, premium bonds, Junior ISAs and other long-term investment vehicles. We will also discuss some of the pros and cons of each product, helping you (hopefully) to navigate the complex world of investing on behalf of your child.

Savings Accounts:

A savings account is the simplest and most traditional way of saving for your children’s future and will probably be the first option a new parent considers. In the UK, you can choose from a variety of savings accounts tailored for children. Children’s savings accounts are designed specifically for those under 18 years old. These accounts typically offer competitive interest rates, and interest earned is tax-free for children. However, the interest rate may change over time, and some accounts may impose withdrawal restrictions. However, the money is generally accessible at any point (subject to T’s and C’s of the account) and you are not restricted to accessing the funds until the child reaches adulthood, for instance. It is important to note, however, that during periods of high inflation, saving cash will not be as gainful as investing, over the long term. 

Junior ISAs:

Junior Individual Savings Accounts (JISAs) are tax-efficient savings accounts for children under 18. They come in two forms: cash JISAs and stocks or Investment JISAs. Cash JISAs work similarly to regular savings accounts (with fixed interest rates), while stocks and shares JISAs invest in a range of assets, such as stocks, bonds, and funds. For both Cash and Investment ISAs earnings and interest are tax-free (up to the annual limit), and funds are locked away until the child turns 18. JISAs can only be opened by a parent or guardian of a child. However, with a Junior ISA, from The Children’s ISA, friends and relatives can pay in with ease.

Premium Bonds:

What are Premium Bonds? Premium Bonds, offered by the UK’s National Savings and Investments (NS&I), provide a unique alternative to traditional savings accounts. Instead of earning interest, Premium Bonds holders are entered into monthly prize draws for tax-free cash prizes, ranging from £25 to £1 million. Premium Bonds are considered low-risk since they are backed by the UK government. They also offer the potential for higher returns compared to some savings accounts, especially if your child wins a large prize. Additionally, bonds can be cashed in at any time with no penalty, providing flexibility.

On the flip side, there is no guarantee that your child will win a prize, and the average return on investment is lower than most high-interest savings accounts, Junior ISAs or other investments. In essence, Premium Bonds are a game of chance with a small chance of ‘winning big’. Additionally, inflation can erode the purchasing power of your initial investment over time, which is also the case for other investment products which are predicated on cash (like savings accounts).

Other investment options:

Some less conventional options, for the less risk-averse parent, could come in the form of investing in individual stocks or shares. This approach can be risky but can yield significant returns if the company performs well. To reduce risk, many consider creating a diversified portfolio by investing in a range of companies and sectors, this diversification tends to provide more stable returns over time. Investment funds pool money from multiple investors to invest in a diverse array of assets, such as stocks, bonds, and property. It is important to note that if, as a parent, you were considering this type of investment on behalf of a child you, and, not your child would be the named individual. Some popular options include index-tracking funds and actively managed funds. 

Actively Managed JISA’s

A Junior ISA, from the Children’s ISA,  are also actively managed funds. What’s more, parents can choose a risk profile that suits them — defensive, balanced or adventurous. The selected risk profile will lead to different underlying investments that the Junior ISA holds and these can range from cash, bonds, shares or property. You might be interested to learn that here at the Children’s ISA, our own Children’s savings are in our funds, so we never forget whose money we are looking after. 

Are there any tax implications for children?

Yes and No. Yes, as children are subject to taxation on their savings because they qualify for the same income tax allowance that adults do. No, as children typically do not have significant earnings, and the interest earned on their savings is usually below the tax threshold. 

We hope you found this to be a useful introduction to investing for your child’s future. Choosing the right path needn’t be daunting.  It is important to understand the advantages and disadvantages of each option, and how they fit with your individual circumstances before you make an investment decision either on behalf of yourself, or your child. 

© The Children’s ISA Ltd 2024. All rights reserved.

The website and the information contained therein should not be regarded as an offer or solicitation to conduct investment business in any jurisdiction other than the UK. Past performance is not necessarily a guide to future performance and the value of your investment may fall as well as rise, and any income received in the form of dividends may fluctuate. You may not get back the full amount when the account is closed. If paying regular monthly contributions please bear in mind that if contributions are not maintained you will be less likely to achieve the investment amount that was originally projected.

The information on this website is not advice, it is provided solely to enable you to make your own investment decisions. The investments and /or investment services referred to may not be suitable for all investors.

The Children’s ISA Limited is authorised and regulated by the Financial Conduct Authority. (FCA No: 563043)
The Children’s ISA Limited is a company registered in England and Wales. Registered Company Number: 07486015

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