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Investing a lump sum for a child: What are the options?

Looking to take advantage of the time your child has now to build a nest egg for their future? Starting investing early can help pay for life events such as university fees or a deposit on their first home.

But what is the most efficient way to invest a lump sum? Often money is placed in traditional banks or building societies but when interest rates are low and inflation is high, you may be looking for more effective ways to grow their money into a substantial sum.

Also consider: Best Pocket Money Apps UK

What should I consider when investing a lump sum for a child?

There are four main entities to take into consideration when looking for the best investment for children including

1. How long can the money remain untouched?

If you have the full 18 years on your side then congratulations, you’ve started early and already have a headstart. With 18 years to ride out any bumps in the market, investing in stocks and shares would be the best way forward. However, with any investments, I would recommend that you seek to remain invested for a minimum term of five years.

2. How much risk are you willing to take?

This ties in with the amount of time you have. The more time, the more risk you can assume as you have plenty of time to ride out market volatility.

3. Will you be subject to tax?

Children are taxed on income they make from investments at a rate of 20% in much the same way as adults. Therefore, you will need to consider whether you need to keep their investments within a tax wrapper to protect them from Capital Gains Tax.

4. What fees will be levied in order to set up and manage their investments?

Fees can start to eat away at investment gains if not managed correctly and therefore it is important to understand all associated costs.

Junior Stocks and Shares ISA

What is it?

A junior stocks and shares ISA is an investment account that protects your child’s investment gains from the taxman. There are two main types of Junior ISA, a stocks and shares ISA, and a Junior cash ISA. Junior cash ISAs are tax-free children’s savings accounts where your child will earn interest on any amount held within the ISA, however, with interest rates being so low, and inflation being so high, this wouldn’t be something I would recommend at this time.

Within a junior stocks and shares ISA, your child’s money will be invested in the stock market and therefore the value of their ISA can go down as well as up. However, historically, investing in the stock market has yielded greater gains than the interest accumulated in a cash savings account.

Within a junior ISA, any money belongs to the child and cannot be accessed by the parent or legal guardian.


  • Can be the quickest way to grow your child’s money
  • All gains are protected from Capital Gains Tax
  • Could achieve an average growth of 5% per year
  • Helps children learn about saving and investing
  • Could help to reduce your inheritance tax bill


  • The value of investments can go down as well as up
  • At the age of 18, your child can do as they please with any funds held within the ISA
  • The maximum Junior ISA allowance is £9,000 per year

Junior SIPP

What is it?

A Junior SIPP is a self-invested personal pension for children. Saving for your child’s retirement may feel like jumping the gun, however, there is a very compelling reason to consider this option – the added 20% tax relief that your contributions will receive from the government and the effects of long term compounding.

This is about as long a term investment as you can hope to make as the child will not be able to access these funds before the age of 55, however, with so much time available, as a parent managing the junior SIPP, you can opt to assume more risk in order to improve investment growth.

There is a limit of £2,880 that you can pay into a Junior SIPP in any one tax year, however, your contribution will automatically attract the 20% government bonus. This could mean, with maximum contributions and average growth of 4% per year, your child could have a pension fund of £95,000 by the time they reach 18, before they have even started working.


  • 20% government tax relief bonus automatically paid on any contributions each year
  • Plenty of time to ride out stock market volatility
  • Child cannot blow the money when they reach the age of 18
  • Can add another 18 – 20 years of growth and contributions to a pension pot


  • Funds cannot be accessed until the retirement age of 55
  • Limit of £2,880 paid in each year
  • The value of investments can go down as well as up

Child Trust Fund

What is it?

This option is no longer available to parents looking to start investing for their children. However, should your child already have a Child Trust Fund, (children born between 2002 and 2011 were automatically enrolled) there are options as to how you can proceed.

Parents can continue to contribute a total of £9,000 per year into Child Trust Fund accounts. This can only be accessed by the child when they reach the age of 18. Alternatively, any savings held within a Child Trust Fund can be transferred to a Junior ISA.


  • All gains are protected from Capital Gains Tax
  • Could achieve an average growth of 5% per year
  • Helps children learn about saving and investing
  • Could help to reduce your inheritance tax bill


  • No longer available for new accounts
  • Maximum contributions of £9,000 per year
  • The child can withdraw the money and spend it as they please when they reach the age of 18

NS&I Premium Bonds

What is it?

Premium bonds are an investment product issued by the NS&I (National Savings and Investment). However, these differ substantially from other investment products as instead of earning interest or dividends, the bond owner is entered into a monthly prize draw whereby they can win between £25 and £1 million tax-free.

Data from the Money Advice Service has suggested that on average, one in three people will win a prize each year with a £1,000 investment.

This may sound more like a lottery than an investment, and given that premium bonds do not earn any interest, any money held within will lose spending power over time as it fails to keep up with inflation.

Whilst premium bonds were popular with parents and family members historically, they are less and less attractive to investors who seek more guaranteed returns on their investments, however, investors looking for protection against financial crisis may still be drawn to the 100% security offered when they buy premium bonds.

You could also consider: Your Comprehensive Guide to UK Treasury Bonds


  • Any money used to purchase premium bonds is 100% secure regardless of the economic climate
  • Chance to win tax-free prizes


  • Money held in premium bonds will not keep up with inflation
  • Maximum holding level of £50,000
  • Poor return on investment
  • No interest

What are the benefits of regularly saving for a child?

Saving early for your child can give them a much-needed head start when they become adults, helping to pay for life events such as university or buying their first home.

Setting up regular savings can not only help build a saving pot quicker, but parents who set up a monthly amount to automatically go into a savings account can often secure a better interest rate should they be saving into a cash ISA.

However, there are also advantages to saving into a junior stocks and shares ISA in this way as well. By drip-feeding money into the stock market, you can actually help to mitigate some of the risk associated with investing as you are always buying in at a different price.

What are the income tax rules for children?

The UK income tax rules for children are the same as they are for adults, which is the reason placing large amounts of savings into the safety of a junior ISA makes financial sense.

That being said, children will only pay tax on savings and interest that they earn over and above £18,500, as like adults, they have a personal allowance of £12,500, as well as a starting savings allowance of £5,000, and a personal savings allowance of £1,000.

This may sound like a lot, however, in order to prevent parents from protecting their own wealth from the taxman, any gift of money to children will attract tax on any interest earned in excess of £100 per year.

Where is the best place to put my kid’s money?

Parents will often place their children’s savings into a bank or building society. However, this isn’t always the best option and this is especially true in times when interest rates are low and inflation is high.

With all the time parents and guardians have to save for their child’s future, investing any money in the stock market is usually the most effective way to grow their wealth.

Above I have detailed some of the most efficient means of investing your children’s money, however, you may still be wondering which investment would be best.

This would largely depend on your investment experience and how hands-on you wish to be when investing for children. People with limited or no experience may be better off investing in a ready-made fund.

There is more detail about the best ready-made junior ISAs and the best self-invested junior ISAs here to help you choose.

Investing a lump sum for a child FAQs

Which are the best children’s savings accounts?

When looking for the best children’s savings accounts, I have compared the interest rates currently on offer. The best interest rate that you could hope to achieve at this time would probably be from Darlington Building Society who are currently offering savings interest of 3% AER on their Junior ISA. However, whilst this is correct at the time of writing, Darlington are at liberty to change this at any time.

The advantage of a children’s savings account is that they offer instant access to funds, allowing your child control of their money which can lead to the development of good savings habits.

There is also the option to save for your child into a regular savings account and this can yield a higher interest rate. Remember to consider whether your child will be paying tax on any gains made before embarking down this route.

How many Junior ISAs can I open for my child?

Parents or guardians are at liberty to open one junior cash ISA and one stocks and shares junior ISA for their child. Other family members are welcome to pay money into the account.

Please note

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.

A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation, which are subject to change in the future.

This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

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