How to start a nest egg for your children and grandchildren 

Father’s Day has just passed – a celebration of parenthood and all the joys that come with it. If you are a parent or grandparent, you likely know the sense of achievement that comes from helping a young person thrive in life.

One of the many ways you might consider supporting a child or grandchild is through the transfer of wealth. By now you will be aware of the financial hurdles that many young people face, including job insecurity and the high cost of living, making it challenging for some to achieve their goals in the time frame they desire.

As you may well know, building wealth takes time. So, if you have young children or grandchildren, now may be the time to begin building a nest egg that they can benefit from in the years to come.

Here are four key options to consider when starting a nest egg for a child or young adult.

 

1. Cash

Although there may be more lucrative saving and investing options when putting funds away for your children, cash is considered the simplest.

When putting cash away for your loved ones, remember to consider the interest your cash will accrue. If your money sits in a low-earning account, its value is likely to be outpaced by the rate of inflation and be worth less by the time your child is able to use it.

You could opt to open a Junior ISA (JISA) and save cash into this, in order for its long-term interest payments to be tax-free, and any withdrawals to be tax-free too.

You can pay up to £9,000 a year into one or two JISAs held in a child’s name. When they turn 16 they can begin to pay in themselves, and at 18, the JISA becomes an adult ISA and they are free to use the funds as they choose.

 

2. Stocks and shares

Purchasing stocks and shares in a child’s name may help to grow wealth over the long term, although this does carry some risk.

Similar to a Cash JISA, you can open a Stocks and Shares JISA in your child’s name, which may be the ideal tax-efficient investment vehicle for them to take on once they turn 18. Over the long term, investing in stocks and shares could be a better way for this wealth to outpace inflation; Schroders research indicates that over a time frame of 20 years or more, equities are likely to outpace inflation 100% of the time, while cash only outpaces inflation 60% of the time.

However, there is the risk of capital loss to consider too, so it’s worth taking independent advice before you act.

If you open a Stocks and Shares JISA, remember that once the child becomes an adult, they have full control. So, it may be worth educating them on core investment principles as they grow up, in order to ensure they make the most of the investments once they are handling the account themselves.

 

3. Child pension scheme

It might seem counterintuitive to begin thinking about retirement when a child is so young. But the truth is, retirement affordability is becoming a concern for many as the cost of living rises and the possibility of going into care increases.

For example, Legal & General says that retirees who hope to draw around £1,900 a month – a middling income for those who are accustomed to a certain lifestyle – need a pension pot of £222,000 and a State Pension income of £921 a month.

With this in mind, it could be worth starting a pension for your child or grandchild. There are limits to consider, including:

• The child’s parent or guardian must open the account before the child turns 18.
• Once the child turns 18, they will automatically be given control of the pension pot.
• The child won’t be able to access their pension funds until Normal Minimum Pension Age (NMPA), which is 55 as of the 2025/26 tax year, rising to 57 in 2028.
• There are specific limitations on how much a person can pay into a child pension each year, which depend on a variety of factors. Speak to a financial adviser for a personalised illustration.

The good news is, thanks to compound returns, your child’s pension could put them in good stead for the future. Evelyn Partners provides an example: if you pay £2,880 a year into a child pension from the year they are born until they are 18, this could potentially be worth £750,000 by the time the child turns 57.

So, it’s definitely worth considering a child pension as a way to build a nest egg for their future, but this isn’t the right move for everyone. Ensure you take advice first.

 

4. Premium Bonds

When you choose Premium Bonds as a way to build a nest egg for your child, you are entering them into a draw that could see them win up to £1 million.

The government-backed scheme gives savers the chance to win a huge amount of money, while being able to withdraw what they put in at any time. Every £1 entered increases your child’s chance of winning a large, tax-free cash prize.

However, it’s important to note that Premium Bonds savings do not earn interest and so, while your child could see a huge return in the form of a prize, the real-terms value of what you put in on their behalf is likely to decrease over time.

As such, it may be wise to make Premium Bonds a small part of what you save on behalf of a child, rather than putting all your eggs in one basket.

 

Work with an adviser and pass wealth to the next generation tax-efficiently

Here at Chancellor, our advisers are here to help you pass wealth to the next generation in any way that suits your circumstances. We can advise on tax, assess affordability, and ensure your wealth is fully protected too.

To get started, email info@chancellorfinancial.co.uk, or call 01204 526 846 to speak to an adviser.

If you’re already a client here at Chancellor, contact your personal financial adviser to discuss any of the content you’ve read in this article.

 

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

All information is correct at the time of writing and is subject to change in the future.

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.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available.

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts. 

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.

The Financial Conduct Authority does not regulate NS&I products or tax planning.