Investing for the next generation

Please see our glossary for information on the financial terms used in this article. 

It’s natural to want to give younger members of your family a leg up financially. We all know how expensive life can be, especially at certain times – whether that’s studying or buying a house. 

Parents and family often do what they can to help children, with many choosing to set aside money for their future during their childhood. One of the most common forms of savings, is putting money into children’s bank savings accounts. However, If you’re able to help your children or grandchildren, it’s important that you do so effectively making good use of any tax benefits available to you. 

Daunting challenges

As property prices have outpaced wage growth, buying a home has become more daunting for many. By one measure, houses are half as affordable as 20 years ago. In England, the median house price in 1997 was 3.6 times greater than median annual salaries. By 2022, it was around 8.3 times greater. The average price paid by first-time buyers in August 2024 was £310,000. 

Before that, your children or grandchildren may have to face tuition fees if they choose to go to university – whereas around two decades earlier it was free to study. 

According to the Institute for Fiscal Studies, students now graduate with average debts of roughly £50,000. While student debts only need to be repaid on earnings above a certain amount, the interest rates on loans taken out since 2012 can be as high as retail price inflation plus 3% – in September 2024, interest on student debts rose to a maximum of 7.3%. It’s easy to see how repayments could place a heavy burden for years, if not decades, after graduation.

Gifts for their future 

If you’re looking to build a nest-egg for a child to prepare them for the financial challenges of early adulthood, there are compelling reasons to take a long-term approach.

Investing early for a child’s future, with the capital locked away for as long as 18 years, gives your money longer to work to deliver returns that can then be reinvested until the money is needed.

Saving money in cash may seem like the safest option – up to £85,000 of your money is safe in a bank or building society as it is covered by the Financial Services Compensation Scheme – but over time, rising prices and inflation can erode its value. 

While investing necessarily introduces risks, it also opens up opportunities for greater returns when compared to cash in a bank or building society, over the long term. It’s important to remember that the value of investments, and the income from them, will fluctuate and you may not get back the original amount you invested and that investments in equities/bonds carries a higher risk than cash on deposit.

When investing for children, it’s worth considering the benefits of Junior ISAs (Individual Savings Accounts). Junior ISAs offer similar tax advantages to ‘adult’ ISAs, but with a lock-in, making the child’s investment inaccessible until they turn 18. Like an ISA, Junior ISAs can invest in equities (shares in a company), bonds (a fixed-term loan usually issued by a company or government) and even multi-asset funds (diversified, ready-to-go investments), giving you flexibility over the future of your child’s long-term savings. 

When children come to access their investments, whether they are 20 or 30, all capital gains will be tax-free irrespective of their circumstances – allowing them to make the most of your gift to realise their ambitions.

Why not find out more about the M&G Junior ISA?

When you're deciding how to invest, it's important to remember that ISA and Junior ISA tax rules may change in the future and their tax advantages depend on your individual circumstances.

The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. We are unable to give financial advice. If you are unsure about the suitability of your investment, speak to your financial adviser. The views expressed here should not be taken as a recommendation, advice or forecast.