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

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

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

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.

Pensions

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.

Investment funds

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.

Independent Partners; request a free guide on NISAs from Hargreaves Lansdown

News
people

Actress sees off speculation about her appearance in an amazing way

Arts and Entertainment
The last great picture - Winner 'Black and White' and overall 'Wildlife Photographer of the Year'
art
Voices
'Irritatingly Disneyfied': fashion vlogger Zoella
voices

News
Carl Bernstein (left) and Bob Woodward (right) with former 'Washington Post' executive editor Ben Bradlee
people

The Washington Post editor helped Bob Woodward and Carl Bernstein bring down President Nixon

PROMOTED VIDEO
Life and Style
tech

Board creates magnetic field to achieve lift

News
There have been various incidents of social media users inadvertently flouting the law
news

Life and Style
Stack ‘em high?: quantity doesn’t always trump quality, as Friends of the Earth can testify
techThe proliferation of online petitions allows us to register our protests at the touch of a button. But do they change anything?
News
Bourgogne wine maker Laboure-Roi vice president Thibault Garin (L) offers the company's 2013 Beaujolais Nouveau wine to the guest in the wine spa at the Hakone Yunessun spa resort facilities in Hakone town, Kanagawa prefecture, some 100-kilometre west of Tokyo
i100
Sport
CSKA Moscow celebrate after equalising with a late penalty
footballCSKA Moscow 2 Manchester City 2: Premier League champions let two goal lead slip in Russia
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Trainee Recruitment Consultant - Birmingham - Real Staffing

    £18000 - £23000 per annum + Commission: SThree: The SThree group is a world le...

    Trainee Recruitment Consultant Birmingham

    £18000 - £23000 per annum + Comission: SThree: The SThree group is a world lea...

    Trainee Recruitment Consultants

    £20000 - £25000 per annum + OTE £Competitive: SThree: SThree Group and have be...

    Helpdesk Analyst

    £23000 per annum + pension and 22 days holiday: Ashdown Group: An established ...

    Day In a Page

    Indiana serial killer? Man arrested for murdering teenage prostitute confesses to six other murders - and police fear there could be many more

    A new American serial killer?

    Police fear man arrested for murder of teen prostitute could be responsible for killing spree dating back 20 years
    Sweetie, the fake 10-year-old girl designed to catch online predators, claims her first scalp

    Sting to trap paedophiles may not carry weight in UK courts

    Computer image of ‘Sweetie’ represented entrapment, experts say
    Fukushima nuclear crisis: Evacuees still stuck in cramped emergency housing three years on - and may never return home

    Return to Fukushima – a land they will never call home again

    Evacuees still stuck in cramped emergency housing three years on from nuclear disaster
    Wildlife Photographer of the Year: Intimate image of resting lions claims top prize

    Wildlife Photographer of the Year

    Intimate image of resting lions claims top prize
    Online petitions: Sign here to change the world

    Want to change the world? Just sign here

    The proliferation of online petitions allows us to register our protests at the touch of a button. But do they change anything?
    Ed Sheeran hits back after being labelled too boring to headline festivals

    'You need me, I don’t need you'

    Ed Sheeran hits back after being labelled too boring to headline festivals
    How to Get Away with Murder: Shonda Rhimes reinvents the legal drama

    How to Get Away with Murder

    Shonda Rhimes reinvents the legal drama
    A cup of tea is every worker's right

    Hard to swallow

    Three hospitals in Leicester have banned their staff from drinking tea and coffee in public areas. Christopher Hirst explains why he thinks that a cuppa is every worker's right
    Which animals are nearly extinct?

    Which animals are nearly extinct?

    Conservationists in Kenya are in mourning after the death of a white northern rhino, which has left the species with a single male. These are the other species on the brink
    12 best children's shoes

    Perfect for leaf-kicking: 12 best children's shoes

    Find footwear perfect to keep kids' feet protected this autumn
    Anderlecht vs Arsenal: Gunners' ray of light Aaron Ramsey shines again

    Arsenal’s ray of light ready to shine again

    Aaron Ramsey’s injury record has prompted a club investigation. For now, the midfielder is just happy to be fit to face Anderlecht in the Champions League
    Comment: David Moyes' show of sensitivity thrown back in his face by former Manchester United manager Sir Alex Ferguson

    Moyes’ show of sensitivity thrown back in his face... by Ferguson

    Manchester United legend tramples on successor who resisted criticising his inheritance
    Two super-sized ships have cruised into British waters, but how big can these behemoths get?

    Super-sized ships: How big can they get?

    Two of the largest vessels in the world cruised into UK waters last week
    British doctors on brink of 'cure' for paralysis with spinal cord treatment

    British doctors on brink of cure for paralysis

    Sufferers can now be offered the possibility of cure thanks to a revolutionary implant of regenerative cells
    Ranked seventh in world’s best tourist cities - not London, or Edinburgh, but Salisbury

    Lonely Planet’s Best in Travel 2015

    UK city beats Vienna, Paris and New York to be ranked seventh in world’s best tourist destinations - but it's not London