Although it might not be immediately obvious to a child, providing a financial gift to their investment account could be transformative later in life, giving them an invaluable leg up as they embark into adulthood. Here we explore the different options available, the most obvious being a Junior ISA, and we explain how financial gifts can potentially benefit the contributor later in life when it comes to calculating their inheritance tax liability.
Although parents may have the best of intentions about building a nest-egg for their children’s future, the harsh reality is that for many families (particularly larger ones) there are simply too many other, more immediate calls on their limited resources.
That’s where the wider circle of family and friends may be willing and able to step up and help with financial contributions to a child’s investment account.
Not everyone’s equally well-placed for such generosity, of course.
The parents’ siblings and friends are likely to be in much the same boat, with their own young families to prioritise. They might nonetheless want to make occasional one-off financial gifts for the new arrival’s birth, birthdays or Christmas perhaps.
However, grandparents, great-aunts and great-uncles and perhaps older empty-nester or childless family friends may be better placed to make contributions on a regular basis.
So, what are the options for family and friends other than parents to get involved in this long-term investment project for the next generation?
Junior ISAs
The obvious place to start is with a Junior ISA (JISA) which allows the investment to grow tax-free over the decades and will then roll neatly into an adult ISA when the child reaches 18.
Up to £9,000 a year¹ can be paid in; that equates to £750 a month, which is a substantial sum for most families, even with multiple contributors involved.
A parent or guardian must open the account, but once it’s up and running they can share the account details with any willing contributor. It therefore makes sense for parents to set up a JISA at an early stage and ensure anyone who expresses an interest in making a contribution is able to do so.
What might that achieve?
Although past performance does not guarantee future results, figures from the Association of Investment Companies/Morningstar show just how rewarding investment trusts have been over the long run. A £1,000 lump sum invested for 18 years in the average investment trust increased in value to over £4,400 by the end of December 2024 – a return of more than 340%.2 In contrast, the FTSE All-Share Index produced a total return of around 165%,3 while the average UK savings account with a £25,000 deposit returned 17%.4
Junior SIPPs
Although often not considered until later in life, today’s pension challenge for children is bigger than ever before. As life expectancy continues to rise, and generous final salary pension schemes are being phased out, younger people find themselves facing a future where they may not have enough savings to ensure a comfortable retirement.
Opening a Junior Self-Invested Personal Pension (Junior SIPP) can give children a big head start. Contributions to a child’s SIPP are open to anyone, not just parents, with total contributions of up to £2,880 a year possible and a further 20% added by the government, effectively raising the maximum annual contribution to £3,600.⁵ It’s important to note that with a Junior SIPP savings are locked away until retirement age.
One of the main advantages of using a Junior SIPP is the timescale involved which means that there is scope for impressive investment growth over the decades.
Clearly, these contributions to a Junior ISA or Junior SIPP could be transformative for the child, giving them an invaluable leg up as they embark on adult life.
Gifts and inheritance tax
There may also be a benefit for grandparents and other older members of the family in paying into a fund on behalf of a young relative, in that these gifts can help to reduce the value of their estate and therefore the amount of inheritance tax (IHT) that may be due when they die.
IHT is not an issue for estates of less than £325,000, and for many couples with a family home to leave to the children the tax-free threshold may be up to £1 million.6
But if it looks as though IHT may be a consideration, making financial gifts over your later decades can be an effective means of keeping those assets in the family (provided you’re confident you won’t need them yourself at a later date).
It’s therefore worth knowing about some key annual IHT allowances that you could usefully take advantage of for nest-egg contributions – though it makes sense to take professional tax advice if you think you may be liable for IHT.
Each year you can give away a total of £3,0007 in gifts to anyone without triggering an IHT liability if you die; and you can also roll over any unused allowance from last year. That means a couple utilising their allowances for the first time could gift up to £12,000 that year - enough for generous contributions to several JISAs!
It’s also possible to make small IHT-free gifts of up to £2507 to any number of people (provided you don’t give them any other IHT allowance gift). This might be useful to bear in mind if you are faced with contributing to a number of grandchildren’s savings pots and want to ensure fairness across the board.
J.P. Morgan Asset Management’s investment trusts
J.P. Morgan Asset Management has a range of highly rated broad-based investment trusts with a long-term growth focus that could make an ideal choice for a child’s JISA or SIPP investment; examples include The Mercantile Investment Trust, JPMorgan Global Growth & Income and JPMorgan American.
There’s no doubt that your commitment to invest on a child’s behalf can make a tremendous difference to their life choices in the long run – and the earlier in their lives you start, the better.