The three steps to investing for your kid’s futures

Doing the best for your kids is the goal of any parent, including setting them up for a successful financial future.

Many parents are on the ball to create a nest egg for their kids, but there is a window to get them started on the journey even sooner than we tend to at the moment.

Data obtained under an FOI request by AJ Bell shows that 70% of the 1.3 million Junior ISA contributions made annually were for children aged 5 to 14, highlighting this is a crucial period when families feel able to save for their child’s future.

And while there are a million pressing priorities in those early months and years of a child’s life, setting up a Junior ISA account to cover those 0-4 years creates an even longer timeline for them to reap the benefits of starting to save early. Currently, just 7% of Junior ISAs are set up during this part of a child’s life and if parents put away £500 a year from birth could grow to almost £15,000 by age 18, assuming 5% annual returns.

That isn’t to say that if you start later that all is lost, and there are practical realities as to why parents don’t set up an account until after their child is through the toddler stage; for example, expensive childcare cost can act as a headwind.

If you start later, when your child is 10-years-old say, putting away £500 a year can equate to just over £5,000 when they hit their 18th birthday. The key thing is that it’s never too early, or too late, to start.  

And on top of that, even if you’re not able to save as much at the start as you might do once your child is in school taking that first step can make a lasting difference to your child’s financial head start in life.

It’s particularly encouraging to see that while many parents start with modest amounts, with over half of all contributions under £500, a significant number are making the most of the generous £9,000 annual Junior ISA allowance.  

Just over 55,000 school-age children, aged 5 to 18, received the full contribution, and among 15 to 18-year-olds, one in ten accounts saw the maximum paid in.  

Three steps to start investing for your kids  

Lots of parents are put off investing by fear or lack of knowledge, but that shouldn’t get in the way of getting started. There is lots of help and support available for first-time investors and in just a few steps you can get started investing.  

Step 1: Pick an account  

The first step is to decide what account to use. When saving for kids you can use a Junior ISA, which means the money is ring-fenced for them and in their name. You can pay in up to £9,000 a year and no one can access the money until they reach 18 – at which point they are in control. Alternatively, you can save money for your child in your own Stocks and shares ISA account. It means you can access the money whenever you want, but it will use up some of your £20,000 annual ISA allowance and the money isn’t neatly ringfenced.

Step 2: Pick an investment route  

You’ll need to work out how hands-on you want to be with your investments. Some people love picking individual stocks or funds themselves, doing research into sectors to invest in and coming up with their own investment portfolio.

Others would rather be more hands-off, and instead opt for a broad global tracker fund or a so-called ‘all in one’ fund, which spreads money across different asset classes, sectors and countries.

There’s no right answer, it just depends on your appetite and spare time to dedicate to investing. Equally you don’t have to choose just one route – some people start with the hands-off approach and then add their own investments on top. But the main thing is to have a plan and get going.

Step 3: Are you an automatic or ad-hoc payer?  

Some time-poor parents will like the idea of automating their investments, so that the same amount goes from their bank account into the investment account each month and automatically buys investments.

Others will prefer to do it ad-hoc as they have money or when they’ve saved up. The benefit of setting up regular investing is that it happens behind-the-scenes and doesn’t require you to remember to log-in and do it.

It also means you’re not trying to time the market, as the investment is bought automatically each month. But if you can only contribute to the account sporadically, it’s probably not the option for you.

And what about at the end?

Your child’s 18th birthday will seem a long way off from when you may have opened their Junior ISA, and as that date draws nearer some interesting trends emerge.

As children get near their 18th birthday there’s a clear drop-off in parents contributing to Junior ISA accounts – with accounts belonging to 15 to 18-year-olds only making up 15% of all contributions. This could be because parents are saving money for other expensive things that come with having an older teenager, like driving lessons, university or other further education, or a first car. But it could also be that parents who haven’t yet started saving for their children think they have missed the boat when it comes to Junior ISAs.  

Some parents may also take the view that once the child reaches 16 they effectively hand it over to them – young adults can manage their own Junior ISA at 16 but can’t make a withdrawal till 18. It’s still worth investing for older children if you can though.

Again, like we said at the start that getting started is the main rather than trying to time it perfectly, even starting at the age of 15 and putting away £500 a year can mean you hand your child a savings pot worth £1,655 when they turn 18, assuming 5% investment growth a year.

And this often translates to positive investing habits for the ISA recipients, as patterns among AJ Bell customers show most will go on to continue investing once the account becomes an adult ISA. So even if you’re only handing over a portfolio with a couple of years of investing behind it there’s a good chance children pick up the baton and use it as platform from which to keep up the investing habit.  

Some parents may be concerned about their kids pillaging the savings pot when they hit 18 and take control of the money – but our recent findings show that’s not the case.  

*Data obtained by AJ Bell via Freedom of Information. Figures from HMRC for end of the 2022/23 tax year.