Just three steps: how to invest for children this Christmas

Any parents struggling to think of ideas for Christmas or who are already drowning in children’s toys at home should think about gifting money or investments instead. While it won’t be as impressive for a child as unwrapping this season’s must-have toy, they will probably thank you later when you hand over a pot of money at their 18th birthday.

Lots of parents and grandparents still default to cash gifts for their children or grandchildren – either in a savings account or some notes to pop in their piggy bank. The latest HMRC data shows that 60% of Junior ISAs paid into in a year were cash versions, rather than stocks and shares*. But considering most children will have a very long time until they reach adulthood, investing can be a great option.

If we look at someone saving £1,000 a year from birth of the child until the age of 18, they’d hand them almost £8,000 more if they invested the money and earned a 5% return a year after charges, compared to a 2% return from cash.

But many parents don’t know where to start, how to get investing or assume it will take longer than it does. In just a few easy steps parents, grandparents, or other family and friends can start investing for the children in their lives.

*Based on 2022-23 tax year data in HMRC’s annual ISA statistics.

Step 1: Pick an account

When you’re starting out it might feel a bit confusing picking the right account. A Junior ISA is a good option for many: you can pay in up to £9,000 a year, the money is ring-fenced in the child’s name, and it’s locked up until they turn 18.

However, if you want a bit more flexibility or think you might want access to the money before the child’s 18th birthday, you could just save the money in your own ISA. It means you’ll have to use up some of your own £20,000 ISA allowance, but that is only an issue if you think you’ll max out that limit for your own savings. The money isn’t ring-fenced, and you can access it at any time – which is both a pro and a con. If you’re worried you might dip into the money it may be better in a Junior ISA, but if you want the flexibility to access it if you need to, it could be a good option.

Your longer-term option is a pension for your child: a Junior SIPP. You can save up to £2,880 in this account, which will get topped up with tax relief from the government to £3,600. But it’s a very long-term option, as your child won’t be able to access the money until they reach retirement age. However, if you made just one contribution of £2,880 at birth and it grew by 5% a year, your child would have a pot worth £58,000 by the age of 57 – showing the magic of investment growth and compounding.

Step 2: Pick a way to invest

You can choose whether to make a lump sum investment for the child or spread the money throughout the year. You can set up monthly investing for the children in your life and contribute a small amount each month.

Many investment platforms will allow you to start regular investing from as little as £25 a month. You can always pause it if you need to skip a month, but it means you don’t have to actively log in and invest money every month.

At the other end of the spectrum, the Junior ISA limit is a whopping £9,000, and any parent or grandparent fortunate enough to be able to put that amount away for their child each Christmas would be handing them a £266,000 present on their 18th birthday, assuming the same 5% investment returns a year. However, for many that will be a pipe dream and even squirreling away a little money each festive season will be enough to help a child out when they’re 18.

Step 3: Pick investments

When it comes to picking investments the first question is whether you want to pick the stocks yourself or outsource that task to a fund. If you opt for funds, you’ll want to weigh up using an active fund manager or a passive fund. There’s no right answer to this, it comes down to preference. Put simply, a passive investment approach will cost you less but will only track the performance of the market – never outperform it. With active management you’re paying more to have a fund manager pick stocks for you, but the hope is that this will generate a higher return.

There’s no need to sit entirely in one camp, you could mix the two approaches. For example, having a broader UK stock market tracker and then using an active fund for a more specialist area. Another option is to pick a multi-asset or ‘all-in-one' fund, which can be active or passive and invests in a mixture of different assets, meaning you only need invest in one fund that is already diversified, rather than picking lots of different investments.

When investing for your children it’s important to think about the timeframe. If they are young, you could have up to 18 years until they will access the money. This makes for a decent investment horizon and means you could potentially take more risk with the money, as you have time to ride out the ups and downs of the market. Conversely, if your child is closer to 18 you might want to take less risk or even stick to cash.