Priceless gift’s a Christmas cracker for children
INSTEAD of loading up your children or grandchildren with yet more toys and gadgets this Christmas, why not give them something with a little more staying power instead? A children’s savings account or investment plan may not be the most exciting gift they will get, but it will still be there for them long after this year’s must-have items are lost, broken or forgotten.
One in five children’s gifts are predicted to be wasted this Christmas, equating to £63 per child according to financial advisor St James’s Place, and that money could be better spent investing in their future.
Youngsters need all the financial support they can get and a pot of savings at 18 could help them buy a car, pay university fees or even put down a deposit on a property.
SAVINGS ACCOUNT
Setting up a children’s savings account can be a priceless gift if it teaches younger family members the value of looking after their money.
Andrew Hagger, personal finance expert at Moneycomms, said early saving encourages positive lifelong habits: “Banks and building societies are keen to win young customers and children’s savings accounts often pay better rates than standard accounts.”
Santander 123 Mini account pays 3 per cent, HSBC Mysavings pays 2.5 per cent and Virgin Money Young Saver pays 1.75 per cent.
Plenty of regional building societies also offer attractive children’s savings accounts, so take a look at what is out there, Hagger said.
Check the rules though. The Santander account must be opened in trust and you only get that 3 per cent when you have £1,500 in the account, and then up to a maximum £2,000. HSBC’S 2.5 per cent is only on balances to £3,000, and falls to 0.25 per cent thereafter.
The interest on children’s savings accounts may be subject to income tax, but only if it is more than £100 a year.
Given today’s miserable rates, tax is not likely to be a problem.
However, it is still worth saving inside a tax-free Junior Cash Isa, as the beneficiary can roll over their money into an Adult Isa at 18, and retain its tax benefits.
Building societies dominate the Junior Cash Isa best buy tables, with Coventry paying 2.95 per cent, and Bath, Darlington and Loughborough all paying 2.5 per cent.
Tesco pays 2.25 per cent. All rates are on £1 and above.
You can save up to £9,000 this tax year, and other family members and friends can contribute, too. Hagger said: “Check if they already have a Junior Isa that you can contribute to.”
Many people are reluctant to invest children’s money in stocks and shares, but in many ways, children are the perfect investors.
Stock markets are volatile in the short term, but deliver superior returns over longer periods such as 18 years or more. Perhaps the best way to invest in stock markets is via a
Stocks and Shares Isa, as all returns will be free of income tax and capital gains tax for life. Again, you can invest up to £9,000, minus any money paid into a Junior Cash Isa.
Rob Gardner, St James’s Place director of investment management, said money invested today can grow into life-changing sums: “If you paid in £1 a day, or £365 a year, that could be worth £11,000 by the child’s 18th birthday, assuming growth of 5 per cent a year.”
If you increase that to £1,000 a year, it would grow to a hefty £30,539 by age 18, Gardner added.
You can choose from scores of investment funds and AJ Bell financial analyst Laith Khalaf tips Liontrust Sustainable Future Global Growth, an ethical or “green” fund that invests in an international spread of companies.
He also recommends Fidelity Index World, a passive fund that tracks global shares with a low annual charge of 0.12 per cent.
Khalaf also rates Standard Life UK Smaller Companies Investment Trust, which is higher risk but should be more rewarding over time.
Alternatively, Dzmitry Lipski, head of funds research at Interactive Investor, tips the hugely successful Scottish Mortgage Investment Trust. For ethically minded children, he recommends Royal London Sustainable
Diversified Trust.
Premium Bonds have been a popular gift for children but the prize rate is now a lowly 1 per cent.
‘Savings accounts for youngsters often pay better rates than standard accounts’
Making gifts to your family today could help to reduce their inheritance tax (IHT) bill tomorrow, but make sure you know the rules.
Only gifts up to £3,000 a year are entirely free of IHT, Khalaf said. “That is a total limit for all gifts you make, excluding those to a spouse or civil partner.”
However, that is an individual allowance, so couples can each gift £3,000, and a further £3,000 if they failed to make gifts in the previous tax year, so they could give £12,000 in total this Christmas with no IHT concerns. If you exceed your annual gifting allowance, then IHT may be due on the surplus if you die within seven years. This only applies if your estate is liable to IHT and is charged on a scale so it shrinks over time.