As the costs of significant life milestones such as higher education, weddings and getting on the property ladder continue to rise, the earlier you can start investing for your children, the better.

Perhaps you are looking to build a nest egg to help your children as they fly the nest in their early adult life, or you may be wanting to help with specific costs later down the line.

Whether you are looking to help your family now or in the future, there are lots of tax-efficient options to consider.

Give your children a start on their savings

There are a number of ways you can put money aside, and build up savings for your children’s future, from simple bank accounts to longer-term investments. A popular savings account for children is a Cash Junior ISA.

A Cash Junior ISA is a tax-free savings account, where up to £9,000 per tax year can be saved on your child’s behalf, with no tax to pay on any interest that’s accrued. There is no restriction on who can pay into the account, meaning grandparents or family friends can also contribute. Interest rates tend to be higher on Cash Junior ISAs than their adult equivalent. The child takes control of their ISA at 16, but no money can be withdrawn until they are 18 where the account becomes an instant access ISA in their name.

If an ISA isn’t right for you, there are plenty of other ways to save for your children, including:

  • Instant Access and Regular Saver accounts: A basic savings account can be opened for under 16s with most banks or building societies. Instant Access accounts let you move your money whenever you want, but you will generally earn less interest.
  • Fixed-term savings accounts: A fixed-term savings account would be a suitable option if you have a single lump sum you’d like to lock away for your child’s future. After the initial deposit, you won’t b able to take money out or pay money in, meaning you won’t be able to build the pot beyond the interest you receive.
  • Investing in a stocks and shares Junior ISA: A stocks and shares Junior ISA allows you to put money into a variety of investments on your child’s behalf, and could potentially help your money grow further, but there is also increased risk involved. Parents, family and friends can pay in up to £9,000 per tax year, and the child will take control of the account on their 18th birthday.

Establishing a pension fund

Rather than building savings that your loved one can access when they turn 18, you may be thinking in the longer-term.

A tax-efficient option you may wish to consider is growing a pension fund, allowing you to build a pot of money that your children will benefit from later in life. Similarly to a Cash Junior ISA, children’s pensions have significant tax advantages, where for every £80 contributed, an additional £20 will be added in tax relief from HMRC. The child can contribute to the fund when they turn 18.

The age at which they can access this pension pot is rising gradually. From 2028 it will be accessible from age 57, and after that will remain at 10 years below State Pension Age.

Retain control over what money is used for with a bare trust

With a bare trust you can invest for your child or grandchild’s future, whilst retaining some control over what the money is used for by appointing yourself as a trustee, with the child as a beneficiary.

All children are eligible for a bare trust account, and there are no investment limits which can be useful if you are looking to reduce the Inheritance Tax liabilities on your estate.

When setting up a bare trust, can be used for the child’s benefit straight away such as educational costs.

A bare trust account can remain open beyond the child’s 18th birthday. When the child turns 18 the trustee will still remain the account holder (unlike with a Junior ISA), but with a bare trust the child has the legal right to access investments and take control of the money.

Investing wisely

When it comes to investing in the future of your children or grandchildren the earlier you can start, the better. There are a number of options available, but what’s right for you and your family will depend on your individual circumstances.

Careful consideration needs to be given to whether the money is needed immediately, or whether you are looking to invest for the long-term.  It is also important to consider how much control you would like to retain over the investments after the child turns 18, not to mention the important question of how much you can afford to invest without impacting your own lifestyle.

This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment it is important to seek independent financial advice.

At Smith Cooper Independent Financial Solutions, we work closely with you to find the best solution for your family’s situation, recommending an investment strategy that will achieve your financial goals.

For further information on giving your children or grandchildren a head start for their future finances, please get in touch with our specialist team today.

Important information: the value of investments can go down as well as up so you may get back less than you invest. Tax rules may change in future.