Forget plastic tat, give a gift that will last
Instead of giving children and grandchildren toys, choose a present that will help them out financially. Julian Knight offers a few ideas
Sunday 04 December 2011
So what are you planning on buying the child or grandchild in your life this Christmas?
A games console maybe? Well, what about something less here today gone tomorrow? A financial gift of cash, shares or even a prepayment card can help them in the future and even teach them a bit about how to handle their money. Here's a selection of financial gift ideas big and small for children.
One of the most popular and long-standing ways of saving for a child is National Savings premium bonds. The bonds instead of paying interest offer the chance to win a range of prizes from £50 up to £1m. "The prize element makes premium bonds a lot of fun for children. They can check the monthly prize draw to see if they have won something," said Francis Klonowski, a certified financial planner and owner of Klonowski & Co IFA. "Overall, on average the returns compared to a higher interest savings account may not be that good, but you can win big and there is a real emotional attachment for the child. It can be a great way to start a child out on the world of saving."
Children's bonus bonds
National Savings again, this time a tax-free bond which runs for five years. Investments start at £25 up to £3,000. Capital is completely safe and interest is paid at the end of the term, but if the bond is cashed in early no interest is due. "On the plus side you get a set rate of interest so you know how much the bond will be worth in five years. However, the rate of 2.5 per cent is not a best buy account," Mr Klonowski said. And this is also well below the current rate of inflation. "At the present rate of inflation after five years your money will be worth about 15 per cent less than it is today. That's not a good starting point for a child's savings," said Jonathan Fry, director of IFA firm Jonathan Fry & Co.
Gold in any form has been a one-way street as far as investment growth is concerned in recent years, with the price of the most precious of metals more than doubling since the onset of the worst financial crisis. "Buying a child a gold sovereign or other gold coin has its appeals. It's a physical tangible gift rather than a scrap of paper or account book. We've also seen strong growth in this asset," Mr Fry said. However, costs to buy and sell gold coins are much higher and the strong growth performance of recent times may not continue. "You're looking at 5 per cent disappearing in buying and selling costs, and in the very long term gold and other commodities have been eclipsed by the stock market," Mr Fry added.
Launched with a whimper rather than a bang a month ago, junior individual savings accounts allow parents and grandparents to put £3,600 in cash or the stock market per year with returns paid free of tax. But to date there are only a handful of providers of JISAs, with many big banks putting plans to launch accounts on ice until the new year. One of these, the Buckinghamshire building society, says the tax break and other benefits of a JISA are not to be sniffed at. "Parents see a savings account as a great tool to financially educate their children," said Jill Carpenter, marketing manger Buckinghamshire Building Society. "They can come in with their own pocket money and see their balances grow. The big banks may not be bothering with JISAs because of the small balances involved but there are still a few accounts paying 3 per cent tax free."
Investment or unit trust
"Generally the longer you've got before the child will need the money, the more risk you can take with the hope of maximising returns," Mr Laird said. And when it comes to getting higher than inflation returns, a unit trust with low management charges is an option. "What clients of mine sometimes do is invest in a unit trust fund and have the account designated in the name of a child but tell the child when only they are responsible enough to manage the investment," Mr Laird said. As for choice of investment, Mr Klonowski prefers the global growth sector. "This has the benefit of diversifying the investment over the world economy rather than being country specific, reducing risk and hopefully providing steady returns," he said. However, for people with a shorter time frame – such as those gifting to a teenager – then a cash savings account maybe a safer bet.
Low-cost personal pension
You can save in a low-cost pension up to the value of £3,600 per year in the name of a child under 18. Contributions are free of tax and the pension can't be accessed until age 55. "It may not have the immediate emotional pull of a games console or a toy, but later in life the child will be hugely grateful for a massive boost to be had from a pension pot," said Mr Laird. "It will have a very long time in which to grow which means it could be worth a tidy sum." And a pension can be a handy inheritance tax saving tool. "Contributions can be made out of regular income which means that they're not liable to inheritance tax."
Prepaid credit card
Parents pay a credit on to a card which the child – over the age of 13 – can then use for spending and withdrawing cash. Parents keep control of the purse strings and prepayment cards have no credit facility. The child can learn budgeting skills while having access to ready cash. However, pre-payment cards from providers such as MasterCard, Maestro, Cashplus Gold and Clearcash do come with set-up, transaction and cash withdrawal fees.
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