Investing for children

Junior ISAs, pensions for a two-year-old, and the tax rule that catches parents out.

Money invested for a child has an enormous advantage: time. A contribution made at three has fifteen years before it's needed for anything, and sixty before retirement.

The question is usually which wrapper, and there's a genuine trade-off between tax efficiency and control.

Junior ISA

Up to £9,000 a year, in cash or stocks and shares, with no tax on growth or withdrawals.

The allowance is the child's, separate from your own £20,000. Anyone can contribute — parents, grandparents, anyone — but only a parent or guardian can open the account.

The money is legally the child's. They take control at 16 and can withdraw at 18.

No withdrawals before 18, other than in exceptional circumstances. That's a feature if you're worried about raiding it, and a constraint if circumstances change.

At 18 it becomes an adult ISA, keeping its tax-free status if left there.

Given the horizon, a stocks and shares JISA is usually the more logical choice for a young child. Eighteen years is comfortably long enough for volatility to matter less than growth. A cash JISA makes more sense in the last few years before 18.

A pension for a child

This sounds absurd and is arithmetically remarkable.

A child can have a pension, and anyone can contribute up to £2,880 a year, which becomes £3,600 with tax relief — a 25% uplift on what you put in, despite the child paying no tax.

Money invested at three has over fifty years to compound before it can be touched. Even modest sums become substantial.

The catch is access. Not until 57, and probably later by the time they get there, given how the minimum age has moved. That's not a savings product, it's a decision made on someone's behalf about their sixties.

Where it makes sense: as a supplement rather than the main plan, funded by grandparents who want to give something that can't be spent at 19, or where a JISA is already being funded to the limit.

The control problem at 18

This is the thing to think about properly rather than discover later.

Money in a Junior ISA belongs to the child absolutely. At 18 they can withdraw all of it and spend it however they like. Your intentions have no legal force.

Most children handle it sensibly. Some don't, and eighteen years of saving can go quickly.

The alternative is keeping it in your own name, earmarked mentally rather than legally. You keep control past 18 and can release it when it seems right. You give up the tax shelter, and it stays in your estate for inheritance tax.

There's no universally right answer. It's a question about the specific child, and it's easier to decide before the account is opened than afterwards.

A bare trust sits between the two, though the child still gains an absolute right at 18 in England and Wales, so it solves less of the problem than people expect.

The rule that catches parents

If a parent gives money to a child and it produces more than £100 of income a year, the whole of that income is taxed on the parent, not the child.

Two things about this:

It applies to parents only. Grandparents, aunts, uncles and family friends are unaffected, which is why gifts from grandparents into a designated account work more cleanly than gifts from parents.
It doesn't apply to Junior ISAs or Junior SIPPs. Both are outside the rule entirely, which is one of the strongest arguments for using them rather than an ordinary account in the child's name.

So a parent investing for a child outside a wrapper needs to watch the income generated. Inside a JISA, the issue doesn't arise.

Grandparents

Worth flagging separately, because grandparents often want to help and don't know the options.

They can contribute to a JISA opened by the parents.

They can fund a child's pension, which appeals to people who like the idea of a gift that can't be spent on a car at nineteen.

They can hold money in a designated account in their own name, keeping control indefinitely.

Regular gifts out of surplus income are immediately exempt from inheritance tax if they meet the conditions, so funding a grandchild's JISA monthly from income may be effective estate planning as well as a gift. See Giving it away.

Do this last, not first

The instinct to prioritise children over yourself is understandable and usually wrong financially.

Children can borrow for education and buy a house later than they'd like. Nobody lends for retirement, and there's no way to make up a shortfall once you've stopped working.

Get your own position right first — the sequence in The order of operations still applies — and invest for children with what's genuinely spare after that.

Then be realistic about the amounts. Modest monthly contributions over eighteen years produce more than most people expect, and the Investment Growth Calculator will show you what a given amount becomes.

This article is for general education only and isn't personal advice. Allowances and the tax treatment of gifts to children depend on circumstances.