How to build a financial nest egg for your child
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Building a financial nest egg for your child has many advantages, including giving them a head start when they’re older as well as helping them to understand how money decisions are made.
Sarah Coles, head of personal finance, Hargreaves Lansdown, says children can also benefit from savings rates which are often more generous than their adult equivalent.
When putting money aside, parents will want to weigh up the different accounts available.
Some parents may want to keep the money in a savings or current account under their own name, to keep it out of reach of the child.
But Coles cautions that parents doing this could “pay the price of less interest, and you also face the risk of being tempted to spend it yourself”.
There are also decisions to be made around keeping savings in cash, or in stocks and shares.
Cash accounts may give parents some certainty over the returns their child will be getting, but Coles says parents could risk missing out on the potential long-term growth available from investing.
“If you have a time horizon of five to 10 years or more, then it’s worth at least considering investment though a stocks and shares Junior Isa,” she says.
Families should bear in mind that the value of investments can go down as well as up, and people may get back less than they paid in.
Anyone, including parents and grandparents, can pay money into a Junior Isa, but the total amount paid in cannot go over £9,000 in the 2024-25 tax year.
Money held in a Junior Isa belongs to the child and cannot be taken out until they reach the age of 18. It can be rolled into an adult Isa.
Coles says Junior Isas can be a great way to introduce kids to investing, adding: “By giving your children a stake, and talking to them about it, they are investors from birth. They never have to think ‘am I the kind of person who invests?’ because they already do.”
Bare trusts are another way to invest on behalf of a child, says Coles.
They are often used to pass assets to young people, with the trustees looking after them until the beneficiary is old enough.
Coles adds that such trusts can often have tax advantages.
People may want to consider taking financial, legal and tax advice on the suitability of a bare trust for their own circumstances before opening an account.
Some parents thinking further ahead may want to contribute to a young person’s pension – and by starting early the interest earned would have decades to roll up.
But Coles says that, given children won’t be accessing a pension until they’re at least aged 50 and over: “It means this is only the right home for money they won’t need as they go through their working life.”
She says this is why, in many cases, parents set up a Junior Isa and a young person’s pension side-by-side.
