A financial gift might not look especially festive under the Christmas tree, but you can be sure the benefits will last longer than the latest ‘must-have’ gadget.
Ross Duncton, managing director of fund manager BMO Global Asset Management, says: ‘While children might not find money in their bank as exciting as a nicely wrapped present, it’s something they will thank their parents or grandparents for when they’re older.’
Financial presents are also bang on trend in the sustainability stakes too. Laura Suter, personal finance analyst at investment platform AJ Bell, says: ‘Parents often lament the sea of plastic toys they end up with after the Christmas period, so they could leave the present-buying to others and instead put some money away for their child’s future.’ But what’s the canniest way of doing it?
Financial presents are bang on trend in the sustainability stakes
STRIKE LUCKY WITH PREMIUM BONDS
It’s unlikely you’ll hit the jackpot, but Premium Bonds from National Savings and Investments have never been easier to buy or give. The minimum purchase was reduced to £25 in February so they are now a more affordable option. What’s more, it’s now not just parents and grandparents allowed to buy them for a child – but any adult.
There is a month’s delay before bonds are included in the draw, so if you buy in December, the first chance to win is in February. Prizes start at £25 and there are two £1million jackpots every month. The average prize rate is equivalent to 1.4 per cent, but some do better, some do worse. It’s a lottery although you never lose your stake.
Parents or guardians can buy Premium Bonds for a child online, by phone or post. If you’re buying for someone else’s child – for example, a niece or nephew – then you can only buy online or by post.
Suter says: ‘It means you could be the auntie or uncle that made someone a millionaire, which is a pretty unbeatable present.’
NEVER TOO YOUNG FOR A PENSION
It might not be very Christmassy to tell your ten-year old grandchild you’ve put money in a pension for them, but, says Jason Hollands of wealth manger Tilney: ‘In the years to come they may well thank you.’
Children have an annual pension allowance of £3,600 like any other non-earner and, says Sarah Coles of Hargreaves Lansdown, the power of compounding means pension saving in their early years can give them a vital head start for the future.
A parent or grandparent can invest up to £2,880 a year which is topped up by the State by £720 thanks to 20 per cent tax relief. Returns would grow tax free. A parent or grandparent doing this each Christmas for 18 years for a newborn child would be able to invest £51,840 – with the taxman adding contributions of £12,960.
Assuming compound growth rate of 6 per cent, the pension could be worth £1.48 million by the time the child reaches age 60. The downside is that the money cannot be accessed before age 55 so you might well not be around to receive that deserved thank you card.
BUY SHARES WITH A JUNIOR ISA
These accounts for under-18s allow up to £4,368 to be saved or invested this tax year, with all returns free from tax.
Funds in a Junior Isa cannot be accessed until a child is 18 and it could help teach them good financial sense, according to Rebecca O’Keeffe, head of investment at Interactive Investor. She says: ‘Buying shares in Nintendo if your kids are hooked on Pokémon – or Tencent if they prefer Fortnite – could be the gentle introduction to the world of investments that helps them form sound lifelong habits.’
Sean McCann, of insurer NFU Mutual, says the downside of a Junior Isa is that a child can access it from age 18. He says: ‘The big question when setting up this kind of financial arrangement is when do you want them to have the money.
‘An alternative option is to set up a trust on their behalf. This is simple to arrange through a solicitor and means you can then decide when the time is right to give them access to the proceeds.’
A LIFETIME ISA IS NOT JUST FOR CHRISTMAS
A Lifetime Isa (Lisa) is a great way for families to give young adults a financial boost. Eligible to be opened for people aged between 18 and 40, the Lisa is designed to help provide a deposit towards a first property purchase or to help save towards retirement.
A Lifetime Isa (Lisa) is a great way for families to give young adults a financial boost
Young adults can invest up to £4,000 in a Lisa each tax year – in investments or cash – until they are 50 with the Government then topping up contributions by 25 per cent. So for every £1,000 invested, the Government adds £250. McCann says: ‘Contributing to a Lisa is a great way for the older generation to give a much-needed leg-up to the younger generation.’
This gift loses the element of Christmas surprise as the Isa has to be opened by the person whose name is on the account, even if someone else is paying into it.
A BARE TRUST TO BE TRANSFERRED AT 18
For those who want to make an investment outside a Jisa or a pension, a simple way to do this is through a bare trust. This is a legal arrangement where the investments are held in the name of a trustee, but for the benefit of the child who has the right to all the capital and income from the trust.
The tax benefits are straightforward: as soon as any assets, such as money or investments, are put into a bare trust, they’re taxed as if they belong to the child, so there will be little or no tax to pay on any income or gains.
Unlike some accounts for children, such as Jisas or junior pensions, there are no limits on how much can be put into the bare trust, the money can be withdrawn at any time (as long as it’s used for the benefit of the child), and the child gets control at age 18 (16 in Scotland).
If the money has been given by a parent and the income is over £100, it’s taxed as belonging to the parent. This is why it can be a useful place for investments by other family members.
Sarah Coles, personal finance analyst at Hargreaves Lansdown, says: ‘Trust funds sound complicated, but this type is really straightforward. Investment platforms usually automatically set up children’s investments as a trust, so you just need a couple of trustees and you’re good to go.’
A CURRENCY CARD… LOADED WITH CASH
If a child is planning to go travelling next year then a useful alternative to your own nostalgic backpacking tales is a pre-paid currency card.
Alana Parsons, from foreign exchange firm Caxton says: ‘You can take out a prepaid currency card yourself and apply for an additional card specifically for your child to take on their trip. The card can be loaded with the currency of your child’s choice.
‘It’s safer than them having to carry cash and the parents can immediately top up the card again at any time if their son or daughter runs short of cash.’
AND FINALLY… USE THE GIFT ALLOWANCE
Gifts can be made annually up to £3,000 without any tax implications. Any unused allowance from the previous tax year can be used, so it may be possible to make financial gifts of up to £6,000 this Christmas if you made none last year.
In addition to the annual £3,000 exemption for gifts, small gifts of up to £250 per individual can be made without any tax implications.
Remember that any cash gifts made above these annual exemptions may be liable to inheritance tax if you die before seven years is up.
£50 a month for £33k nest egg
INVEST NOW… FOR THEIR FUTURE
As with a pension, if you invest early on behalf of a child and then save regularly, you could be storing up an impressive windfall for your loved one.
Research from the Association of Investment Companies shows that if an 18-year-old’s parents – or grandparents – had made a one-off £1,000 investment in the average investment company when their child was born, it would now be worth an impressive £5,510.
‘Alternatively, if they had made a regular investment of £50 a month, the £10,800 invested would by the age of 18 have grown to £33,169 – a great financial start to adult life.
Annabel Brodie-Smith, a director of the association, says: ‘Many parents and relatives are aware that the financial demands being placed on young people today have never been greater.
‘So they may want to give a gift that’s not just for Christmas.
‘Putting money into an investment company can help build a nest egg for a child’s future.’
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