2 efficient methods of investing on behalf of a child

Investing on behalf of a child can help set them up for success – and it may have financial benefits for you, too. Learn 2 efficient ways to do so here.

Your children and grandchildren are bound to meet plenty of opportunities as their lives progress. One way you could help them to pursue life’s bounty of opportunities is by investing on their behalf from an early age.

While you could simply invest in your own name and lay aside funds for the next generation in your will, this means that a portion of your children’s money may be subject to Inheritance Tax (IHT). Plus, they would need to wait until you pass away to benefit from your wealth – and could even have passed up on important opportunities before this time arrives.

Whereas, investing on their behalf while they are still children might give your children access to substantial funds earlier in life, which may help them to:

· Pay for educational opportunities when they finish school

· Buy their first home

· Travel the world before starting a serious career

· Support themselves in the early stages of their working life.

Continue reading to learn two efficient ways you could invest on behalf of your child or grandchild, and learn how these routes could benefit your own financial circumstances as well.

1. Start a pension for your child

As you may know from your own working life, pension contributions often form an essential part of an individual’s future security.

Paying into your pension regularly may mean you can retire at the age you want and live comfortably for the rest of your days. Retiring without a healthy pension pot, on the other hand, could be risky.

Seeing as a pension is an invested asset, paying into a pension on behalf of a child means they could benefit from many more years of compound returns.

For instance, a study conducted by pension provider, Nest, offers measurable examples of the benefits of early pension contributions.

In the study, two individuals pay £200 a month, including tax relief, into their pensions over a 10-year period. At the end of the decade, both have paid £24,000 into their pot.

However, the first contributor made their payments between the ages of 22 and 32, whereas the second person contributed between the ages of 32 and 42. Assuming a 5% annual return until the age of 60, the two pension pots would be valued as follows:

· The person who paid in between age 22 and 32 would have a pension worth approximately £125,000 when they retire at 60.

· The person who contributed between age 32 and 42 would have a pot worth around £77,000 at age 60, even though they paid in the same amount.

Now, imagine that your child begins to benefit from compound returns from the age of just five years old. This would mean their pension pot may have 13 years to grow before they even become an adult and begin making their own contributions.

What’s more, there could be additional advantages of paying into a child’s pension from your own financial perspective.

Usually, contributions into a child’s pension fund receive tax relief at the basic rate. That means that your contribution of £100 may actually be “worth” £125 As of the 2023/24 tax year, parents and grandparents are allowed to pay £2,880 net (£3,600 gross) into a child’s pension fund every year.

So, if you have maximised your own pension Annual Allowance in that tax year and wish to make further pension investments that could benefit your children later, this move could have significant upsides for both you and your child.

If you are interested in opening a pension on behalf of your child, it could be helpful to speak to a Kellands financial planner first. You can also read more of our insights about child pension funds on our news page.

2. Open a JISA

A Junior Individual Savings Account (JISA) is a type of ISA designed to help parents invest on behalf of their children.

Much like adult ISAs, you could subscribe to:

· A Cash JISA. This is very similar to a regular cash account, with the added perk of any gains being free from Income Tax.

· A Stocks and Shares JISA. In these accounts, you can invest on behalf of your child without returns being subject to Income Tax or Capital Gains Tax (CGT).

Unlike adult ISAs, however, the JISA has its own annual contribution limit. As of the 2023/24 tax year, this stands at £9,000.

Once your child is 18, the JISA becomes an adult ISA and they can access the funds in full.

Having a pot of money to draw from when your child turns 18 could help them to start adult life with a financial buffer, and may encourage them to go after the opportunities they want once they have finished school.

Plus, paying into a JISA on behalf of your child could help you leave a “living legacy” for the next generation. Rather than investing in your own name, and potentially leaving these investments vulnerable to IHT later, you may instead wish to invest through a JISA and give your children access to this money earlier in life.

Speak to a financial planner about setting your children up with a solid financial future

We’re here to help you put a financial plan in place that puts the next generation first. Email us at hale@kelland.co.uk, or call 0161 929 8838.

Please note

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

All contents are based on our understanding of HMRC legislation, which is subject to change.

The Financial Conduct Authority does not regulate estate planning, tax planning or will writing.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.

Workplace pensions are regulated by The Pension Regulator.


< back to News & Views

News & Views

May 23, 2024

How could stealth taxes affect your wealth in 2024?

In the past four years, many aspects of your financial life may have changed.
Read more