Can Children Invest?

The answer is yes…

Children benefit from significant allowances on tax-efficient accounts. For example, parents can invest up to £9,000 per child per year in a Junior ISA and £2,880 per child annually in a Junior SIPP. Even though the child is not a taxpayer, the SIPP will gain from pension tax relief.

JUNIOR ISA

Upon the birth of their child, parents can open a Junior ISA and contribute up to £9,000 per tax year. Parents could end up paying £162,000 into the ISA over the course of their child's first 18 years. But by the time the child reaches the age of 18, this amount will have increased to £240,000 if we anticipate investment growth of 4% annually after fees.

After the child reaches the age of 18, the Junior ISA automatically converts into an adult ISA (with its own £20,000 annual allowance), which they can use to save for other things like higher education, a home, or a first-class round-trip ticket to Mars! It's worth remembering that at 18 the money becomes legally theirs to do with as they wish. If you'd like more on the wrapper itself, see our guide to your ISA allowance.

JUNIOR SIPP (Pension)

A Junior SIPP allows parents to contribute up to £2,880 annually, and the government will add an additional £720 per child, bringing the total yearly contribution to £3,600. Over the course of 18 years, a child could receive a total of £51,840 in Junior SIPP payments from parents. However, this is increased to roughly £65,000 after tax relief and to £96,000 when 18 years of 4% annual investment growth are taken into account.

The funds from the Junior SIPP will be locked away until the child reaches the normal minimum pension age (currently 55, rising to 57 from April 2028, and likely to keep rising in the decades before today's children retire). Even if you stopped making contributions once they turned 18 and the fund grew by 4% annually, that £96,000 pension account could grow to a substantial sum by the time they reach retirement age, thanks to decades of compounding. Our explainer on pound cost averaging shows why that long time horizon is so valuable.

What’s the secret formula

Although many parents stick to cash for their kids' savings, an 18-year time horizon is the perfect length of time to invest the money and take on more risk. It's the best approach to achieve returns that outperform inflation throughout that time span and might greatly increase your child's future fortune in a world growing more and more expensive to survive in.

Now let us be brutally honest. Many parents will undoubtedly find it difficult to save £11,880 year for each child, but they can enlist the aid of grandparents, other relatives, and friends who are all eligible to contribute to Junior ISAs and SIPPs to assist them meet their goal.

Teamwork makes the dream work - let’s go!

Alongside investing on their behalf, it's worth teaching children good money habits early. Our guide on raising financially smart children has plenty of fun, practical ideas.