Lots of parents want to start a savings account for their child but are put off by the array of accounts on the market. From cash to investing, from Premium Bonds to regular savers, or an ISA versus a pension, there are lots of options.

For the purposes of this article we’ll assume that you want to invest for your child, rather than save in cash.

The majority of money put away into savings accounts for children sits in cash, which flies in the face of logic when you think that for many of those accounts there will be 18 years until the child is an adult and able to access them (although cash has a place for some families).

If you want to invest for your child you have two main options: use a Junior ISA or opt for a Junior SIPP (self-invested personal pension).

HOW DO THE ACCOUNTS DIFFER?

Both a Junior ISA and Junior SIPP are tax-efficient accounts, which means any gains generated on the investment are protected from tax, as well as any income. Considering the money could be invested for up to 18 years, you’d hope it will make decent gains during this time, so you’re protecting those from tax.

One of the main differences between the two is the age at which you can access the money. For a Junior ISA the money is locked away until the child reaches their 18th birthday, at which point it’s theirs to manage. It can be rolled over into an adult ISA or they can cash in the money. If they decide to cash in the money any withdrawals will be tax-free.

For a Junior SIPP the money can’t be accessed until the child reaches their retirement age. At the moment this is the age of 55, but is rising to 57 and is likely to be even higher by the time the children of today come to retire. When they do come to withdraw the money only 25% of it will be tax-free, with the rest charged at their marginal income tax rate. Although these rules could well change between now and your child reaching retirement age.

The other difference is that with a pension you get the benefit of tax relief, even if your child isn’t a taxpayer (which most children aren’t). This means you get a 20% top-up on any money you put in, which is a good incentive to save.

HOW MUCH CAN I PAY INTO EACH?

The allowance on a Junior ISA is a very generous £9,000 a year per child. For a Junior SIPP the annual allowance is £2,880 per child, which is then topped up to £3,600 thanks to the Government adding tax relief. With AJ Bell, for example, you can start from as little as £25 a month with either account.

On thing to note is that a Junior ISA account must be set up by the parent or guardian of the child, but after that anyone can pay into it. For a Junior SIPP, anyone can set up the account, so it might be a good option for grandparents who want to put cash away for their grandkids without having to involve parents.

WHAT CAN I INVEST IN WITH EITHER ACCOUNT?

With most providers you can make exactly the same investments in either account, including funds, shares and investment trusts. You might decide to make riskier investments if you opted for a pension, to reflect the fact that the money could be locked up for almost 60 years, but you can put money in all the same investments with either account.

HOW MUCH COULD MY CHILD END UP WITH?

Let’s take the Junior ISA first. If you start early and start small you can still build up a significant pot. If you put £20 a month away from birth and it was invested, generating 5% a year, your child would have a pot worth just over £7,000 by their 18th birthday, excluding any fees.

If you increased that amount to £100 a month you’d be handing your child an 18th birthday present of almost £35,500, assuming that same 5% a year growth. And if you’re fortunate enough to be able to put away the full £9,000 a year limit, they’d have £267,000 by the time they are 18 – likely making you the most popular parent in the UK.

With a Junior SIPP the annual limit is smaller, but the top-up from the tax relief and the much longer timeframe means the money has a bigger chance to grow.

If you put that same £100 a month in as the example above, from birth to age 18 growing at 5% a year and then just left it to grow with no further contributions, the pot would be worth £238,000 by the age of 57. Even a smaller contribution of £50 a month from birth to the age of 18 would amount to £119,000 by the age of 57.

For lump sum savers, who have got a windfall and want to save it for their children, a £1,000 investment when the child is born that grows by 5% a year and where no further additions are made will equal £2,400 at the age of 18 and just over £16,000 at the age of 57.

DISCLAIMER: Financial services company AJ Bell referenced in this article owns Shares magazine. The author of this article (Laura Suter) and the editor (Tom Sieber) own shares in AJ Bell.

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