Saving and investing for children and grandchildren

Time (and allowances) on your side

One of the biggest advantages of saving and investing for the next generations is time. As there is a longer time frame to save and invest, children and grandchildren can benefit from the power of compounding. This is where reinvested interest or growth has the potential to generate further growth over the long term.

Children who are UK resident are entitled to their own tax allowances. In the 2026/27 tax year, they can earn up to £12,570 without paying income tax. Capital gains tax (CGT) is only payable on gains above £3,000.

Children may also benefit from a personal savings allowance of £1,000 in the 2026/27 tax year, as well as up to £5,000 under the starting rate for savings. The starting rate for savings tapers away by £1 for every £1 of income over the personal allowance of £12,570.

However, there is one main caveat to these thresholds for children. If the income generated is from money given to the child by a parent, then different rules and limits apply.

By combining a long investment time horizon with these allowances, parents and grandparents can build meaningful nest eggs for the future generations. 

Junior individual savings account

As with an adult ISA, any growth, interest or income in a junior ISA (JISA) is free from income tax and CGT.

All children have an annual JISA limit, which is £9,000 for the 2026/27 tax year. JISA subscriptions can be in stocks and shares, cash or a combination of both up to the total overall limit.

Only a parent or legal guardian can open a JISA for their children, but anyone can pay into it once it is set up. The account belongs to the child, but money in a JISA cannot be accessed until they reach the age of 18. At 18, the child has full legal control over their JISA money.

Because of their tax-efficient status, JISAs can be a powerful tool in helping fund future goals such as education costs or a first step into the property ladder. But the rules around when the money can be accessed should also be taken into consideration.

Personal pensions

For those who want to help their children or grandchildren with longer-term financial security, a personal pension also offers tax advantages.

You can generally contribute up to £2,880 per child every tax year into a personal pension. Basic rate tax relief of 20% is added automatically, taking the gross annual contribution to £3,600. Only a parent or legal guardian can open a pension for their children, but anyone can pay into it once it is set up.

A pension is built for the long term – it’s about setting money aside today for life much further down the line. With a child's pension, this means the savings made now won’t be available for several decades. This is because pension savings can’t normally be accessed until later life (currently from the age of 55, rising to 57 from 2028).

At age 18, the child can take control of the account. From that point on, it’s their choice. They can continue to contribute and build on what is already there, potentially turning it into a much larger retirement fund over time.

With such a long time horizon, the money invested has more time to grow and benefit from compounding. Of course, as with any investment, values can go down as well as up, so growth isn’t guaranteed.

Because the money is locked away for so long, a pension isn’t designed for nearer-term goals such as university fees or the deposit on a first home. In these cases, a junior ISA may be more appropriate. 

Investment accounts in trust

Investment accounts held in trust can be another useful additional option, particularly for grandparents who want to set money aside for a child’s future.

One of the main benefits is flexibility as there’s no limit on how much you can contribute.  This can be helpful if a child’s ISA and pension allowances have already been used.

With a simple (bare) trust, any income or growth is treated as belonging to the child. This can be tax efficient, especially if the child has little or no income of their own.

However, there are a few important rules to be aware of. If a parent makes a gift into the trust generate more than £100 of income in a tax year, the tax treatment changes and the parent may need to pay tax on that income instead. This rule is designed to stop parents using trusts mainly for tax purposes. However, it does not apply to gifts from grandparents or others.

Access to the money will depend on the type of trust. With a bare trust, the child becomes entitled to the funds at 18 (in England and Wales). This may appeal to grandparents, for example, who want to help with university costs for their grandchildren, but who have already used the annual £9,000 junior ISA allowance.

For those who would like more flexibility and control over how and when money is passed on, a discretionary trust may be worth considering. With this type of trust, the trustees decide how and when money is used, which can help ensure it’s managed carefully rather than spent too quickly.

Discretionary trusts can also be set up to support different family members over time, including future generations. They offer a degree of flexibility as circumstances change, and may provide some protection if a beneficiary goes through a divorce or faces financial difficulties.

In some cases, discretionary trusts can be helpful for families with disabled or vulnerable children. This is because money held in trust is not usually taken into account when assessing eligibility for certain means-tested benefits, such as Universal Credit and housing benefit. 

However, trusts can be complex and the tax treatment is not always straightforward. The rules can also change over time. Anyone considering setting one up should seek professional advice to make sure it’s the right option for the situation. 

Children’s savings accounts

Families may also consider putting some money into a children’s savings account. These are typically suitable for under-18s who want easy access to short-term savings.

Giving a child a savings account can help to teach them about budgeting and financial responsibilities, encouraging regular, healthy savings habits.

Children can make use of their £1,000 personal savings allowance, as well as the £5,000 in starting rate for savings if their income is low.

As with other saving and investing for children, interest and income over £100 per year from money gifted by parents could create a tax liability for the parent so it’s important to check this carefully.

The good news is that children’s savings accounts often offer more competitive interest rates than can be found on adult accounts. This is because companies hope to build long-term loyalty in the young. But if you are looking for long-term growth, investments may be more appropriate. Exposure to equities offers the opportunity for long-term growth. In contrast, the interest rates on cash savings tend to be relatively low. High inflation also erodes the value of cash over time. That said, investing does come with risk and values can go down as well as up. 

Protecting our future

There is no one-size-fits-all approach when it comes to saving and investing for children – the right mix will depend on each family’s goals, priorities and circumstances. But one thing that can make a difference is starting the conversation early.

Helping children understand how money works, from saving and investing to spending wisely, can give them confidence and good habits that stay with them for life. Over time, that knowledge can be invaluable, helping ensure they feel better prepared for whatever financial challenges the future may bring.

The value of an investment with St. James's Place will be directly linked to the performance of the funds selected and the value may fall as well as rise. You may get back less than the amount invested.

An investment in equities and shares will not provide the security of capital associated with a deposit account with a bank or building society. However, please bear in mind that over the long-term inflation will erode the purchasing power of your capital. 

Please note that cash junior ISAs and savings accounts are not available through St. James's Place.

The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.

Trusts are not regulated by the Financial Conduct Authority.