6 ways to invest for your child’s future

Santa may be on his way very soon – but rather than adding to the collection of forgotten toys in your child or grandchild's toy chest, why not consider a gift that will keep on giving by paying into a savings or investment account on their behalf?

Receiving an investment for Christmas might not excite a young recipient today, but they’ll thank you when they reach adulthood and have a plump nest egg potentially worth tens of thousands waiting for them. 

As an added bonus, making financial gifts to family members can also help with estate planning and reducing your own inheritance tax (IHT) liability.

Here, Which? rounds up the best financial gift ideas that can help kids meet future life goals, whether that's buying their first car, paying their way through university, or putting down a deposit on a home.

Please note that the information in this article is for information purposes only and does not constitute advice. Please refer to the particular terms and conditions of a provider before committing to any financial products

1. Children’s savings accounts

Who are they for?

Children's savings accounts are a good option for anyone looking for a simple and effective way to introduce a child to the concept of saving money and earning interest.

How do they work?

As with adult savings accounts, you can choose between instant access, regular and fixed-rate accounts.

They generally work in the same way as adult accounts, but the age range of children that a bank or building society is willing to accept can vary.

A child's parent or legal guardian will also need to be with them to open the account, so if this isn’t you then you’ll need to ask them to do this for you.

Rates are currently on their way down, but if you act fast there are still good deals to be had.

Pros of children's savings accounts:

• Easy to set up and - unlike some other savings options - the money can be accessed whenever you like.

Cons of children's savings accounts:

• If the child receives more than £100 in interest from money given to them by the parent, then the parent is liable for tax on the interest if it's above their own personal savings allowance. We explain the tax that children pay on their savings, and the parents' '£100 rule' in our children and income tax guide.

Find the best savings rate with our best children's savings accounts guide.

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2. Cash junior Isas

Who are they for?

Junior Isas, also known as Jisas, are the under-18 equivalent of adult Isas that you can open on behalf of a child. Jisas are a great option for anyone who wants to save for their children over the long term, while also keeping the money free from tax.

How do they work?

Cash junior Isas are long-term cash savings accounts that parents and legal guardians can open for under-18s who live in the UK. Interest is paid on the savings. 

Parents, relatives and friends can pay up to £9,000 into a Jisa for a child each year (split across the cash Jisa and any investment Jisa they may hold). Just as with a regular Isa, any interest earned on money within a cash junior Isa is completely free of tax.

A child can't access the money in a Jisa opened on their behalf until they turn 18. At this point, the Jisa converts to an adult Isa and the young person has full control over the money.

Pros of cash junior Isas:

• There's a generous allowance of £9,000 per year.
• Any interest earned within the Isa wrapper will be free of tax.

Cons of cash junior Isas:

• The money is inaccessible until the child turns 18.
• A child can only hold one cash Jisa and one investment Jisa. New rules from April 2024 that allow adult savers to hold and pay into multiple Isas of the same type in the same tax year don't apply to Jisas. 

Find the best rates with our best junior Isas guide.

3. Investment junior Isas

Who are they for?

The children's equivalent of adult stocks and shares Isas, investment junior Isas are higher risk than cash junior Isas but offer the potential for better long-term returns. 

How do they work?

Investment junior Isas can be used to buy and hold shares, funds and other types of investment, without incurring any form of tax on returns (including income tax, capital gains tax and dividend tax).

Parents and guardians can set up investment junior Isas for children under the age of 18 who live in the UK.

Parents, relatives and friends can pay up to £9,000 per year into an investment Jisa (subject to any money paid into a cash Jisa, as the £9,000 limit applies across both types). 

Over the long term, investing can achieve a higher return than a regular cash Jisa if the investments perform well. For example, assuming 5% annual growth, investing the full £9,000 every year would net your child £265,851 by their 18th birthday, according to AJ Bell.

Pros of investment junior Isas:

• Any money held within the Isa wrapper is tax-free.
• Investments can garner bigger returns than interest on cash deposits.

Cons of investment junior Isas:

• You could lose money – the success of investments is dependent on the market. There's no guarantee you'll get back the money you invested.
• There may be monthly or annual fees to pay to use some investment platforms, along with management fees for buying and selling shares.

Find out more with our best investment junior Isas guide.

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4. Premium bonds

Who are they for?

Premium bonds can be a good choice for anyone who wants a safe, government-backed option that also has the slim chance of making your child a millionaire.

How do they work?

Anyone aged 16 or over can buy premium bonds from National Savings & Investments (NS&I). You can also buy premium bonds as a gift for a child, giving them a chance of winning up to £1m. While anyone can buy premium bonds as a gift - whether or not you're related to the recipient - only a nominated parent or legal guardian can manage the bonds on their child's behalf. To make it more personal, you can even ask NS&I for a free gift card and write your own message.

The minimum investment is £25, with a maximum holding of £50,000 per person. 

By holding premium bonds, the child stands a chance of winning prizes of between £25 and – if they're really lucky – £1m. Any winnings are entirely tax-free. 

Although you don't earn interest on premium bonds, NS&I publishes an annual prize fund rate, which reflects the amount of money it will give away in prizes. From January 2025's draw onwards, the premium bond prize fund rate will fall from 4.15% to 4%. The odds of winning will remain the same at 22,000 to 1 and there will still be two jackpot winners, but the estimated number of prizes worth between £50 and £100,000 will drop by 201,328.

Pros of premium bonds:

• There's a chance of winning £1m. Every month, two lucky winners will get the jackpot, and many more will win prizes from £25 upwards.
• Winnings are tax-free.

Cons of premium bonds:

• You might not win any prizes – it's all down to chance; specifically, a 22,000 to 1 chance for each £1 premium bond held.
• There's no savings interest, so if you’re unlucky you could end up with no gains at all, running the risk that your investments will lose money in real terms due to the impact of inflation.

Find out more with our premium bonds guide.

5. Children’s pensions

Who are they for?

They say it's never too early to start saving into a pension, so If you want to plan for a child's extremely long-term future, a junior Sipp (self-invested personal pension) is worth considering. Particularly given that - as you may be surprised to hear - even non-taxpayers can get pension tax relief.

How do they work?

Junior Sipps can be opened for a child anytime from birth until they turn 18. While only a parent or legal guardian can start one, anyone can contribute once it's up and running.

Unlike adult self-invested personal pensions (Sipps), which let you pay in up to 100% of your earnings every year and qualify for tax relief on contributions up to a maximum of £60,000, the junior Sipp allowance is just £3,600, including tax relief.

This means it's possible to invest up to £2,880 into a junior SIPP, which is then topped up by the government with £720 in tax relief.

Pros:

• As with all pensions, investment returns are free from tax (although income tax may be due when a child eventually starts to draw from the pot).
• There's huge growth potential – saving for retirement from birth gives a long period of time for undisturbed compound growth.

Cons:

• Your child may not be thrilled with a gift they can’t touch until they’re 55.
• The maximum contributions are relatively small in comparison with a Jisa or an adult pension.

6. Trusts

Who are they for?

Trusts are a potentially useful tool for anyone who wants to set aside large amounts of money for the benefit of a child later in their life.

How do they work?

A trust is a way of holding money or other assets on behalf of someone else.

As an example, bare trusts are often used to hold assets for a child to ensure they don't use them until they become an adult. One of the main benefits of a bare trust is it allows you to use a child’s capital gains tax exemptions.

Pros:

• Can be used to set aside assets or large sums of money.
• You can set the rules on when the child is able to access assets held in trust. 

Cons:

• There will be a charge to set up and - potentially- to manage a trust.
• Trusts are complicated to set up, so it's recommended to speak to a financial adviser beforehand.

Find out more with our guide on how to choose a financial adviser.

The tax benefits of gifting

While it may not be your first thought when setting up a child or grandchild for a solid financial future, monetary gifts – to children or anyone else – can also be a useful tool for inheritance and estate planning.

You can gift up to £3,000 per year to anyone, without it being considered for inheritance tax purposes.  You can give more to relatives – £2,500 to grandchildren, and up to £5,000 to your children – plus up to £1,000 if someone gets married. 

And any gifts given at least seven years before your death will also be exempt from IHT. If you die within seven years of making the gift, the IHT amount may be reduced due to 'taper relief'.

• Find out more: Inheritance tax planning and tax-free gifts