Investing for children – the gift that keeps on giving?
As Christmas approaches, we look at a gift that goes well beyond the festive season.
This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.
20 December 2021
Financial decisions impact almost all aspects of our life, everything from which brand of coffee we buy on our weekly food shop, to considering whether to go onto higher education. But when it comes to our finances, surprisingly, over 80% of adults know little about investments, savings and ISAs.
We typically develop our money habits and attitudes around the age of seven. Though children as young as three recognise that different items cost different amounts of money, and that money needs to be kept safe. Laying good financial foundations early on by delivering money lessons through everyday opportunities, can set children on the right track for the rest of their life.
Lots of early lessons will likely revolve around spending, but it's also essential to teach the importance and benefit of savings.
With Christmas just around the corner, you might want to think about a gift that goes beyond the festive season.
The article isn't personal advice. If you're not sure what's right for you or your child, ask for financial advice.
The gift that keeps on giving?
If grandparents or family friends offer money for presents, consider ringfencing some, putting it aside and saving it on the child's behalf. Granted, a savings account doesn't flash, buzz or fly – but if put to good use, it could help them a lot more further down the line.
The benefit of such a gift is twofold.
Firstly, you're providing a valuable life lesson on the difference between money for immediate needs and for longer-term goals.
Secondly, if that money's invested for the long term, they'll benefit from the most powerful tool in investing – compounding. Letting any increases build on themselves will help grow that pot so it's worth more down the line. Remember though, unlike the security offered by cash, investments can fall as well as rise in value, so your child could get back less than you invest.
Take a child who's been born this year. If their parents set aside £50 a month for 18 years and we assumed the investment grew 5% every year, it would eventually be worth £17,333 – that's £6,533 investment growth and £10,800 of contributions. This is just an example, actual returns will depend on the investments you choose and it doesn't take account of inflation or charges.
By starting early, it could provide a significant boost further down the line.
Find out what size nest egg you could build by trying out our regular investing calculator.
There's also the benefit of sustainability. Uncertainty around climate change has led to an increasing focus on sustainability and sparked widespread efforts to reduce plastic waste. A savings account or Junior ISA could offer an alternative, more sustainable solution to a traditional Christmas gift.
Should you think about investing your child's money?
Every UK resident child can have a Junior ISA. Anyone can save or invest tax-efficiently for them in the JISA, up to the annual allowance (£9,000 this tax year). A child can have a cash or stocks and shares Junior ISA, or both. It's important to remember though that tax rules can change, and their benefits will depend on individual circumstances.
Lots of people tend to opt for cash Junior ISAs. But if you have over five to ten years before your child plans to use the money, it could be worth considering investing.
Over the longer term, investing money for your child lets you take advantage of the long-term growth potential in the stock market. It could give you a better chance of outperforming inflation and beating any returns you get from just holding cash. You must be happy with the risks of investing though as nothing is guaranteed.
The HL Junior ISA
- Can be opened with a £100 lump sum or a direct debit starting from £25
- Once opened by a parent or guardian, anyone can add money to it
- Has access to a wide variety of investments including funds, shares, ETFs and investment trusts
- Converts to an HL Stocks and Shares ISA once the child turns 18
Remember, you can't have both a Junior ISA and a Child Trust Fund (CTF). So if you wanted your child to have a Junior ISA instead, you'd have to transfer the CTF.
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