A financial Christmas gift can set your child up for life
Although they may lack the appeal of the latest game, an investment or account will often prove the better present, says Chiara Cavaglieri
Sunday 09 December 2012
Nobody wants to be seen as a Christmas Scrooge, but beneath the festivities there can be an awful lot of waste. Today's shiny new toys can be tomorrow's recycling, or worse still, landfill.
So no wonder many parents and grandparents, in particular, prefer to make a financial gift, either in cash or by opening an account or investment. They figure that if you can help children build a nest egg as well as a savings habit, you could set them up for life.
Junior ISAs have been around for just over a year, and although take-up has been poor there is much to recommend them. They have a tax-free, annual subscription limit of £3,600, which will rise in line with inflation from April 2013.
Unlike their predecessor, Child Trust Funds, there is no government contribution to kick-start your child's investment, but they are still free from capital gains and income tax.
Money can be invested in stocks and shares, a cash-based JISA, or a mix of both by splitting the contribution, for example £500 in cash and £3,100 in stocks and shares. You can only hold one JISA, but unlike adult accounts, you can also transfer from cash to stocks and shares and back again.
"For those willing to consider riskier assets in the hope of larger returns over the long term, a stocks and shares JISA may be the way to go," says Darius McDermott of Chelsea Financial Services.
"To give you an idea as to how much could be saved on behalf of a child, a monthly contribution of £50, assuming growth of 7 per cent per annum, could grow to a pot of more than £21,000 over 18 years. A maximum monthly contribution of £300 could grow to almost £130,000."
One downside is that once your child reaches 18, the JISA is passed entirely into their hands – you may want them use the money to pay for university fees, but legally, it's up to them what they do with the cash.
Children's savings accounts
If you want a more flexible gift, you can look into conventional savings accounts for your offspring. But ask to sign a R85 form so that they receive gross interest without any tax deduction.
Children have the same personal income and capital gains tax allowances as adults, but parents are liable for income tax if their child earns more than £100 a year from money they've contributed (this rule doesn't apply to grandparents and other family members).
Some accounts offer free gifts, but take these with a pinch of salt as they are often trying to hide lower returns. For the top rates you may have to forgo the ability to dip in and out of the savings. For example, Halifax's Children's Regular Saver is a popular choice, paying a healthy 6 per cent, but this is fixed for one year, and you must deposit between £10 and £100 per month.
"Restrictions can vary between the account being held in trust by an adult, to the parents having to authorise the withdrawals made and sometimes proving the withdrawals being made are for the benefit of the child," says Charlotte Nelson of Moneyfacts.co.uk.
Premium Bonds are a long-standing family favourite. You can buy them for under-16s from National Savings & Investments (minimum investment is £100). Every month, instead of earning interest, you could win monthly prize draws.
"The average return is 1.5 per cent tax-free, but actual winnings are down to luck. The odds of a single bond winning in any one month are 24,000 to one, but each month you are in with a chance of receiving a cheque for £25 or £1m," says Mr Lowcock.
Over the long term, you need to be thinking about pensions and individual savings accounts (ISAs).
You can put £3,600 each year into a pension on your child's behalf, with the Government offering tax relief, so that this only costs you £2,880.
When you consider both the tax benefits and the notable effect of compounding over the years, a pension doesn't seem quite so boring.
"The £2,880 also falls under the £3,000 annual gift limit for inheritance tax, thereby exempting it even if you die within seven years. This is one way of transferring money IHT-free to children while you are still alive," says Adrian Lowcock of Hargreaves Lansdown.
Stakeholder pensions are straightforward and relatively cheap with restrictions on charges, or you can go for a Sipp (self-invested personal pension) which offers greater choice as to what you invest in.
No pension is perfect, however, not least because your child won't be able to access the money until they are 55. In that time, pension rules could have changed considerably, but it also means that pensions are of no use for some important milestones such as university fees, or a deposit on their first home.
You could also set up an investment fund and pass it on to them when they are 18.
When you're investing for a young child, the extended time frame gives you time to ride out volatility.
The stock market is risky, but over the long term you could argue that cash is too because it is easily eroded by inflation.
High-risk sectors such as emerging markets have the potential to offer impressive returns, but if you aren't confident about picking individual shares, you can buy a unit or investment trust so that the fund manager does the hard work instead.
Pick someone with a good track record, such as Neil Woodford who presides over the Invesco Perpetual funds, or Mr Lowcock's choice, Sebastian Lyons who runs the Trojan fund.
Investing in gold
The three kings knew what they were doing when they gave the gift of gold.
You don't get any income, interest or dividends, so you are reliant on demand and supply, but it is considered a safe haven against inflation.
"Inflation is key for real assets. I don't think we are going to have any hyper-inflation issues for some years, but if and when we do, real assets are the place the be. And by then the price of gold could have already gone up considerably," says Mr McDermott.
You can buy coins (which are exempt from capital gains and VAT), bars and jewellery, but you'll need to think about storage and insurance.
With stocks and funds you don't have a physical asset but you can gain exposure to international companies mining gold.
Exchange-traded funds (ETFs) can be relatively cheap and held within an ISA or Sipp, but if you want a managed fund Mr McDermott likes the BlackRock Gold & General and Investec Global Gold funds.
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