Getting nest egg for your children all wrapped up

YOUR children or grandchildren are unlikely to put a savings plan high on their wish lists this Christmas, but you should still aim to pop one in their stocking anyway. A children’s savings account or investment plan may not generate the same gasps of joy as say, a new iphone or Xbox, but with any luck they will thank you for it one day.

So instead of throwing money away on more plastic junk, teach your little ones the value of money and the joys of compound interest by building a pot of savings in their name.

With Christmas just over a week away, there is no more time to waste. So what are your options?

START SAVING

A children’s savings account is a must, especially if it comes with a cash book or mobile banking app, so they can watch their money grow.

While all-time low interest rates have hammered returns on cash, the good news is that banks and building societies typically pay slightly higher rates to children, in the hope of securing their custom for life.

Today, the average account pays 1.51 per cent according to Moneyfacts.co.uk, double the 0.74 per cent on the average grown-up’s account.you can get a lot more from a regular savings account, although that will only pay for a limited period.

Moneyfacts finance expert Rachel Springall said the Halifax Kids’ Monthly Saver is the current top regular savings account, paying a fixed 4.5 per cent on contributions between £10 and £100 a month. “It only runs for 12 months, so the most you can pay in is £1,200,” she said.

After one year, the money is moved into a Kids’ Saver account, which currently pays 2 per cent on up to £5,000.

If you prefer a standard children’s savings account, HSBC’S Mysavings pays a variable 3 per cent on up to £3,000 (falling to 0.75 per cent thereafter) but is only for children aged from seven to 17.

Springall said: “Virgin Money’s Young Saver pays a variable 2.25 per cent, but no lower age restriction.”

Also check out what your local building society is offering, as many have market-leading deals. Buckinghamshire pays 2.25 per cent, Harpenden pays 2.20 per cent, Chorley pays 2.15 per cent and Bath pays 2.05 per cent.the Children’s Instant Saver from Barclays pays 2 per cent.

TAXING QUESTION

Children can earn up to £100 interest a year on money given by a parent, step-parent or guardian without any income tax liability, although interest above that may be taxable on the adult.

There is no tax liability on money gifted from friends and family, including grandparents.

Or you can save a maximum

£4,368 this financial year in a Junior Isa and take all returns free of income tax and capital gains tax.

Coventry Building Society’s Junior cash Isa pays 3.6 per cent, while Darlington Building Society, National Savings & Investments and TSB pay 3.25 per cent. tesco Bank pays 3.15 per cent and Halifax 3 per cent.

Parents and legal guardians can open and manage a Junior Isa for children under 18.The child takes control from age 16, but cannot make withdrawals until they turn 18, when the money can go into an adult Isa with full tax benefits.

You are only allowed to have one Junior cash Isa and one Junior stocks and shares Isa.

STOCKS AND SHARES

Many parents and grandparents are reluctant to invest in the stock market but children arguably make the best investors of all, because they have so much longer for their money to grow in value.

If investing for 18 years, you can afford to ignore short-term stock market volatility, while benefiting from superior long-term growth.

Laura Suter, personal finance analyst at investment platform AJ Bell, has calculated that putting a child’s full Junior Isa allowance in the

Best Buy Junior cash Isa every year would give a child £114,000 at age

18, but that could rise to £131,000 if invested in a stocks and shares

Isa that grows 5 per cent a year after charges.

A range of platforms offer stocks and shares Junior Isas, including AJ Bell,

Fidelity, Charles Stanley Direct, Hargreaves Lansdown, Interactive Investor and vanguard.

You then have to choose investment funds to put inside this tax wrapper.

CHRISTMAS FUTURE

Moira O’neill, head of personal finance at Interactive Investor, said you can pay in either a single lump sum or regular monthly amount: “A monthly investment of £50 over 18 years would cost £10,800 in total, but would have grown to £33,169 by the time the child reached adulthood.”

Paying in every month can smooth out stock market volatility, she added: “Markets can seem risky, but tend to rise over the long term.”

Annabel Brodie-smith, communications director of the Association of Investment Companies, said the financial demands on young people mean they need all the help they can get: “An investment plan is one gift that’s not just for Christmas.”

‘If investing for 18 years, you can afford to ignore any short-term stock market volatility’