Why should you set up a Child Investment Account?

With people living increasingly long lives and the majority of wealth in the UK still held by over 60s, it’s a sign of the times that we are finding a growing appetite amongst families for parents and grandparents to gift funds to their children and grandchildren during their own lifetimes. This has the double benefit of allowing older family members to witness their loved ones benefit from gifted wealth whilst also potentially reducing an inheritance tax bill by making use of the relevant allowances and exemptions. 

This trend has been magnified by the unrelenting increases to UK property prices over the last 30 years, meaning that many Millennials and Gen Z-ers would prefer to have any future inheritance in their twenties and thirties in the hope of gaining a place on the housing ladder. 

Clients will often approach us, having already started to put some money aside for their children or grandchildren but without any formal structure or strategy behind this money.  

Clearly, there is the obvious option of simply placing any such funds in a separate account on deposit with a bank or building society, perhaps locking away longer-term pots for greater timescales in effort to achieve a better rate of return. Whilst inflation is so high it’s vital that this money isn’t languishing in poor paying accounts and in fact, if placed in a competitive high interest account you’ll still need to ensure you switch accounts regularly to boost returns and combat inflation as much as possible. Investing, however, could be an option for those looking to preserve the real value of any funds that they are looking to save, over the longer term. Another thing to consider if you keep the money in cash, without moving the funds into a specially designated account, they will ultimately remain in the name of whoever is saving them, thereby not making use of the fact that children will broadly have the same tax allowances and exemptions as their parents, as well as some added ones (more on that later!). 

Whilst a cliché, the simple fact of the matter is that the earlier you start, the better. By taking advantage of a long-time horizon and the wonders of compound interest, those saving for their children or grandchildren can grow the pot significantly for relatively little effort from the outset - ultimately leaving more to be spent on the important things such as attending university or buying a first property. 

There is also the important benefit that this brings in helping children to understand their finances. Discussing accounts that have been set up for their benefit can help to prompt conversations around the value of money as well as educating younger generations about broader economics. 

What is a child investment account?  

A child investment account is ultimately opened by a parent or guardian and is held in the child’s name but looked after by a parent/guardian on their behalf, usually until they turn 18. 

Such accounts are often used to house regular savings from parents, grandparents or other friends/relatives as well as funds received from birthdays or other significant life events.  

Accounts can also be used as succession planning vehicles by those wishing to begin passing on wealth to their heirs during their own lifetime, in an effort to mitigate inheritance tax. 

What is the best child investment account?  

Children born in the UK between 2002 and 2011 were gifted £250 each by the government upon opening a Child Trust Fund (CTF) account, an initiative to engage a savings habit among children.  CTFs are no longer available to be opened as new accounts and existing accounts can be converted to its successor the Junior ISA (JISA), which was introduced as a replacement to CTFs in 2011. JISAs remain the main tax-incentivised savings account for children in the UK. 

JISAs work in the exact same way as a traditional adult ISA would in that they benefit from tax-free growth and dividends or interest, making them unrivalled in tax-efficiency as a children’s savings vehicle. Due to these advantages, there is a limit as to how much can be placed into a JISA each year, for the 2023/24 tax year this is £9,000 per child. Note that this is lower than the standard ISA allowance of £20,000 for an adult. 

The benefits of such accounts are obvious, however there are a few important points to be aware of when considering whether to open a JISA for a child, and parents should be made aware of some of the alternative options available.  

Probably the most important point to be caveated is that any funds placed into a Junior ISA become fully accessible to the child on their 18th birthday. As a result of this, parents should carefully consider the amounts placed into a JISA account, as multiple years of funding can lead to significant funds being accrued, particularly when accounting for compounded returns on invested funds. 

This can often prompt an open and honest conversation with clients surrounding the appropriate amount to be placed into a JISA, the specifics of this can vary hugely depending on each family’s individual circumstances. 

An alternative can be to place funds into a trust set up for the benefit of a child, this will have the added benefit of allowing parents or other relatives to retain control of any assets being placed into trust, however the assets will not be subject to the favourable tax treatment of a JISA. There are also associated legal and accounting costs in setting up and maintaining a trust which should be borne in mind when deciding if it might be appropriate. 

Where families have fully exhausted Junior ISA funding and still have excess funds to contribute into a children’s account, they might look to set up an investment account that is owned on bare trust for the child until they turn 18 (note this is separate from the aforementioned type of trust). There are no limits as to how much can be placed into an “unwrapped” investment account, however there will be no tax benefit as in a JISA and any gains made will use up the child’s personal tax allowances. This point is of particular note, in light of the recent fall in the Capital Gains Tax (CGT) annual exempt amount from £12,300 to £6,000. This amount is scheduled to halve again for the 2024/25 tax year to £3,000. 

Benefits of opening a child investment account

There are many clear benefits to opening an investment account in a child’s own name, most notably allowing them to make use of their own tax allowances and exemptions, including the Junior ISA. There is an added bonus for 16 and 17 year-olds who can place a total of £29,000 into tax-free ISA accounts through utilising their JISA allowance as well as the standard £20,000 allowance that can be placed into an adult cash ISA. Stocks and shares ISAs cannot be opened by anyone under the age or 18. 

Can I set up a pension for my child? 

Whilst planning for your child or grandchild’s retirement might seem very far down the priority list, setting up a Junior Self-Invested personal pension (SIPP) can be a very effective planning tool for ultra long-term funds as well as bringing many tax advantages. 

A junior SIPP, like all defined contribution pensions, benefits from basic rate tax-relief on all contributions; they also grow free of any tax on capital gains or dividends and sit outside of an individual’s estate for inheritance tax purposes. The account holder will also be able to access 25% of their pension tax free with the rest taxed at their marginal rate of income tax, under current legislation. It is important to note that a pension cannot be accessed until age 55 currently, rising to 57 in 2028.

Junior SIPPs, are much like JISAs in that they are held by a parent/guardian on their child’s behalf until age 18. They can be funded by parents, grandparents, relatives etc who can place a maximum of £2,880 per child into a SIPP each year, which will then be topped up to £3,600 by basic rate tax-relief from the government. Contributions can be made beyond this limit but will not receive any top up. Junior SIPPs will often have specially tailored investment strategies, different to that of the family’s other investments, in light of their ultra long-term time horizon. The pension will automatically transfer to the child on their 18th birthday, at which point they can continue to contribute as they move into the world of employment.  

The significant changes to pension rules proposed at the most recent Spring Budget have significant implications for those looking to save into a pension. Government’s plans to abolish the Lifetime Allowance (previously £1,073,100) makes pensions even more tax-advantageous and removes some of the concern around being penalised for accruing larger sums within the pension's wrapper. 

If you’d like to learn more about the benefits of setting up a child's investment account for your loved one, why not get in touch and see how we can help.

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Please note: A pension is a form of investment. The value of investments can go down as well as up, you may not get back what you originally invested. Your capital is at risk. The Financial Conduct Authority (FCA) does not regulate estate planning, tax or trust advice.