Nappies, baby milk… and a Junior Isa? It may not be the first thing new parents think to add to their list, but starting an investment pot early can give a child a powerful financial head start.
A Junior Isa lets parents and relatives save or invest up to £9,000 a year for a child, with any interest, dividends or investment growth sheltered from tax, much like a standard adult Isa.
If a family paid in the full allowance every year from birth until the child turned 18, the total contributions would come to £162,000.
Kept in a cash Junior Isa earning 3pc interest, that nest egg could rise to nearly £227,000 by the time the child reaches adulthood.
But the long-term growth potential can be far greater in a stocks and shares Junior Isa. If the money achieved 6pc annual growth, the final pot could exceed £309,000 — around £82,000 more.
Parents do not have to build the savings alone. Grandparents, godparents and other relatives can all chip in, and a Junior Isa contribution can make a meaningful alternative to another birthday or Christmas present.
These accounts can be opened as soon as a child is born. However, young people are allowed to take control of the account at 16, and they can withdraw the money once they turn 18, so it is sensible to discuss early how you hope the funds will be used.
If the money is left untouched, the Junior Isa automatically becomes an adult Isa on the child’s 18th birthday, allowing them to keep saving and investing into the account if they choose.
Junior Isas allow a family to stash away up to £9,000 a year for their youngsters
Parents have the option to save for their child in a Cash Junior Isa, effectively a type of savings account, often with a set rate of interest. Of the £1.8billion that was subscribed to Junior Isas in 2023-2024, around £655million – roughly 36pc – was in cash, according to Government figures.
While it might be tempting to choose the safe option when dealing with your child’s financial future, a stocks and shares Junior Isa could lead to greater rewards.
For those who start setting money aside when their children are young, the long time horizon until the money can be accessed is well-suited to investing. This means the money has years to grow and compound, and to ride out any dips in the stock market along the way.
Even smaller amounts add up over time. Investing £100 a month from birth could build a pot worth almost £40,000 by age 18 – enough for a first car, to help with university fees or even a house deposit.
Ben Yearsley, of Fairview Investing, says: ‘Your first instinct with young children is to protect them, so it’s no wonder so many parents and grandparents decide to save money for them in cash. But this is a time to embrace risk.’
Choosing a mix of growth-focused investments alongside some ‘Steady Eddies’ which can endure market volatility, is a smart way to help build a tidy nest egg.
Kamal Warraich of Canaccord Wealth suggests starting with a tracker
Kamal Warraich, of Canaccord Wealth, suggests starting with a low-cost global tracker fund for the core of the portfolio.
These offer instant diversification, investing in thousands of businesses across the world. Popular options include Fidelity World Index and Vanguard FTSE Global All Cap Index. For a balanced option that will protect the pot from market dips, consider the Troy Trojan fund. This invests in bonds issued by the UK, US and Japanese governments as well as in gold and the shares of multinational businesses, such as Visa. It has returned 21.5pc over five years.
The Blue Whale Growth fund is a ‘high conviction’ portfolio investing in just 30 stocks, which the management team believe are the highest-quality, fastest-growing companies on the planet. Its top holdings include semiconductor maker Nvidia, gambling company Flutter Entertainment and luxury goods firm Moncler. It has returned 99.5pc over five years.
Fidelity Special Situations is run with a ‘contrarian’ approach – selecting businesses unloved by other investors but which they believe are due a turnaround.
The fund also offers exposure to small and medium-sized firms, which can often achieve faster growth than their larger counterparts. About 80pc of the portfolio is invested in UK stocks and it has returned 81pc over five years.
To add another layer of diversification, consider infrastructure funds. These invest in assets such as roads, railways, airports, trains and utilities. They often have very long, inflation-linked contracts, so they can provide a growing income to investors each year.
Yearsley rates First Sentier Global Listed Infrastructure. It has returned 41pc over five years.
Investing might not be front of mind for new parents, but starting early can lead to substantial gains. And fostering an early interest in investing in a child could lead to a lifelong – and lucrative – habit.
