Best Long-Term Investments for a Child

Junior ISAs (Individual Savings Accounts), or JISAs, are among the most popular investment options for children as they provide a tax-efficient way to invest in children’s future. It allows parents and other relatives to contribute funds tax-free into the child’s account up to a limit, called the JISA allowance.

Parents have control over a JISA until the child reaches the age of 16, at which point the account becomes theirs. However, they can’t access the funds until they reach the age of 18. Between the ages of 16 and 18, the child can own both a JISA and an ISA and split their investments between the two according to their needs.

There are two types of JISAs parents can open for their children:

• Cash JISA, which works just like a regular savings account, but it allows investors to earn interest tax-free;

• Stocks and Shares JISA where the contributions are invested into various funds, and the capital gains are not subject to tax implications.

In simple terms, cash JISAs are a safer option for parents who need an investment option for smaller and steadier returns, while stocks and shares JISAs are slightly more risky, but have a larger growth potential.

Junior SIPPs (Self-Invested Personal Pensions) are another investment option tailored for parents and their underage children that come with government-provided tax benefits. Namely, parents and other willing contributors can invest up to £2,880 per year in a single Junior SIPP account and receive 20% of tax relief on their contributions.

The funds invested in a Junior SIPP are invested in different types of portfolios offered by SIPP providers, and it’s up to the users to decide on the risk levels and potential growth opportunities.

It’s worth noting that children can take control of their Junior SIPP when they reach adulthood, but they won’t be able to access their money until they reach the age of 55, according to the current laws. The age limit is expected to be moved to 57 in 2028.

Parents looking to start Junior SIPPs for their kids need to be aware and consider the fact that further law changes may occur by the time their kid reaches retirement age, and act accordingly.

Admittedly, thinking about children’s pensions might be a stretch; however, parents that can look past that can actually do wonders for the retirement of their offspring.

By investing up to the annual contribution limit for the first 18 years of their kid’s life, they give them a substantial head start. And by the time their kid reaches retirement age, the investment would grow into a hefty sum, allowing them to reach their retirement goals much easier.

Also known as a bare child trust fund, Junior Investment Accounts (JIAs) are an alternative investment option for children, but unlike Junior ISAs and Junior SIPPs, they don’t provide tax-free savings.

Like other investment options for children, JIAs allow parents to choose from a wide range of investment options, including stocks, bonds, mutual funds, ETFs, and more. They can tailor the investment strategy to their preferences and achieve more stable or higher returns.

Once the child reaches adulthood, they gain full control over the account and can utilise the funds for any purpose, whether it's further education, starting a business, purchasing a home, or other financial goals they may have.

Additionally, unlike Junior SIPPs and ISAs, JIAs allow parents to access the funds before the child reaches adulthood, as long as it’s used for the child's benefit. This makes them a great option for parents who want a long-term investment for their kids while retaining the right to access the funds in case of unforeseen circumstances.

While they were a very popular option back in the day, NS&I premium bonds have all but lost their appeal in modern times. Given the fact that they offer no interest rate, they are far from a long-term investment for a child but can be a more fun birthday gift than cash in an envelope.

These government-backed bonds can be bought by people over the age of 16 and can be gifted to children under 16 by parents, grandparents, and great-grandparents.

The minimum that can be invested in an NS&I premium bond is £25, while the maximum is £50,000. Kids with premium bonds take control over their accounts when they reach the age of 16, at which point they can decide whether to keep the bonds or cash them in.

If they decide to keep the bonds, they will continue to be eligible for the monthly prize draws. If they choose to cash them in, they will receive the principal amount of the bonds in its entirety, along with any prizes they won, and don’t have to pay tax on them.

Premium bonds are still attractive in the eyes of some investors as they are backed by the government and are essentially a 100% safe investment.

However, unless the child gets lucky and wins a massive prize, without interest, the value of the investment can erode through inflation and opportunity costs. For this reason, while fun and unique, NS&I premium bonds are highly speculative and may not be the most effective means of growing wealth or generating income over the long term.

As a final option, instead of getting an investment account, parents who want to play it safe can always start a savings account for their children.

Creating a safety nest for children by putting money in a savings account is a common practice, but it’s not a long-term investment, as savings accounts don’t have the potential for growth like other investment options.

Parents can open a savings account for their children as soon as they are born, and kids can take control of their accounts and learn healthy financial habits at the age of seven.

There are two main types of savings account for children:

• Instant access savings account, also known as easy access savings account, is the more flexible type and allows users to deposit and withdraw funds at any time;

• A regular savings account, which is a bit more rigid, requires a set amount of money to be deposited on a monthly basis for a specific period of time and restricts early withdrawals.

Out of the two, regular savings accounts generally tend to offer higher interest rates.

It’s important to point out that while both saving and investing are financially responsible practices related to securing financial freedom, they are inherently different and serve two different purposes.

As previously mentioned, saving and investing aim to achieve two fundamentally different goals.

• Saving is setting surplus money aside and keeping it in a safe place from which it can easily be accessed later when required.

• Investing is using surplus money to purchase assets or make financial commitments with the expectation of generating a return or increasing wealth over time.

Here’s a table that displays the main differences between saving and investing.

As you can see, there are multiple ways to invest or save money for children, and picking out the best option along with the investment platform depends on a few important factors.

The first thing you need to decide is whether you are looking to save or invest money long-term.

As mentioned above, investment accounts usually come with specific restrictions like early withdrawal penalties or limitations on when you can withdraw the funds without incurring additional fees.

If you can’t afford to lock the money away for a longer period of time and want the option to access it when necessary, look no further and just get a savings account.

However, if access is not a problem for you and you are looking to build wealth over a longer time, take note of the following considerations.