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.
- 4 #JeSuisEd: People share photos of themselves eating awkwardly in solidarity with Labour leader
- 5 Women think Irish men are the sexiest, survey finds
In defence of liberal democracy
General Election 2015: Post-election 'shambles' looms as 70 per cent of voters say SNP 'should not be able to veto UK government policies'
The Rothschild Libel: Why has it taken 200 years for an anti-Semitic slur that emerged from the Battle of Waterloo to be dismissed?
General Election 2015: UK will be 'run for the wealthy and powerful' if Tories retain power, Labour warns
General election live: SNP suspends two members for disrupting Labour rally
General Election 2015: Sturgeon claims Scots 'appalled' by Ed Miliband's refusal to work with SNP
iJobs Money & Business
£60000 - £70000 per annum + benefits : Ashdown Group: A highly successful, glo...
£25000 - £30000 per annum + benefits: Ashdown Group: A global leader operating...
£27 - 35k + Bonus + Benefits: Guru Careers: A Management Accountant is needed ...
£40-50k + Benefits.: Guru Careers: A Project Manager / Business Analyst is nee...
Day In a Page
Located in the University area, this semi-detached five-bedroom home is arranged over three floors - there's even a rear garden and off-road parking too.
Only a few minutes' drive from the charming town of Marlow, this two-bedroom home sits on the private riverside estate of Harleyford.
This detached four-bedroom home in Middleyard is arranged over two floors, with features that include a wood-burning stove and bespoke oak staircase.
In a row of eight detached Georgian residences, this five-bedroom home offers views of The Sound, Mount Edgcumbe and Cornwall from its impressive veranda and full-length balcony.
If you love cooking for friends this two-bedroom flat - complete with views of the iconic Battersea Power Station and an open-plan kitchen/dining area - will go down a treat.
Located above Grasmere village, this five-bedroom home is arranged over three floors and offers countryside views across Grasmere Lake towards Silver Howe.
Surrounded by the Western fells, this five-bedroom Georgian home retains many original features including panel-plastered ceilings, sash windows and fireplaces.
This six-bedroom home is set amongst three acres of grounds. Currently a large family home, Clift Hill has potential to make a B&B, subject to change of use permissions.
A former period coach house, Glebe Farm Stable is now a three-bedroom cottage with a double car barn, office, kennels and an outbuilding that's currently used as a gym.
Set sail for this four-bedroom farmhouse in Cowes. With five acres of land and an indoor pool, this home oozes character. There is even potential to let a one-bedroom annexe.
Surrounded by woodland, this five-bedroom manor house has plenty of outdoor storage space in the form of three converted loose boxes, two smaller outhouses and a woodstore.
This four-bedroom detached home comes with a double carport, useful workshop, garden and two walkways that offer views of the adjacent countryside.
With space for an equestrian business, a greenhouse for growing your own veg, a wine store and a gym; this five-bedroom home has all the ingredients for a country retreat.
This four-bedroom home has exposed brick chimneys and a vaulted ceiling in a breakfast room that's ideal for summer entertaining - the doors open to the patio and garden.
The decked roof terrace of this two-bedroom flat is perfect for summer drinks while large windows and ample storage space make for a light and spacious interior.
Surrounded by approximately 15 acres of grounds, this six-bedroom grade II-listed home has been extensively refurbished yet retains many period features.
This four-bedroom home comes with a two-bedroom cottage and commercial office, with planning to extend, in a stunning courtyard setting.
In a pretty Norfolk village, this four-bedroom family home is surrounded by landscaped gardens, with even a self-contained annex for guests.
A few miles from the seaside at Perranporth, this four-bedroom farmhouse sits amongst nine acres of idyllic grounds - including a lake and two barns used as holiday lets.
This five-bedroom home is arranged over three floors of a converted Victorian hospital, offering spectacular views of the Pentland Hills - only three miles from the city centre.
This four-bedroom detached home comes with grounds that span to approximately 2.5 acres, as well as two large patio areas and a double garage.
This four-bedroom cottage is a Grade II-listed town house, well-located for the thriving market town of Nailsworth.
A four-bedroom apartment on the ground floor of a stunning period property in North Yorkshire, with two kitchens and a large south-west facing garden.
This high-spec two-bedroom home is part of a smart collection of new flats at Beaufort Park and has a large decked balcony that's perfect for summer drinks.
Capitalise on the fabulous views of Trevone Bay by taking two homes and creating one spacious boutique B&B. Just a cliff-top walk from Padstow.
Overlooking a golf course, this six-bedroom Edwardian detached home spans four storeys and retains many period features including the original, operational servants' bells...
On the edge of the city, this six-bedroom home comes with an outdoor swimming pool and a large garage block that has annexe potential.
In a Grade II-listed manor just outside of Bath, this three-bedroom home is arranged on two floors with a skylight in a vaulted roof line.
Open the living room's bi-fold wooden doors to reveal a retro-style kitchen, and a conservatory leading to a paved garden at this three-bedroom home.
A Grade II-listed, four-bedroom home, in a charming Somerset village, with a two-storey studio that could be converted into a holiday cottage
A modern four-bedroom Victorian home, within walking distance to the high street
A luxury apartment in the Gothic mansion of Wyfold Court in Kingwood, offers six bedrooms spread over three floors and a turret
This school conversion, near Stockwell Tube, oozes New York loft style. The one-bedroom flat features double height ceilings and exposed brick work
This six-bedroom Georgian home is on three floors with open fireplaces, a two-oven Aga, an annexe, and cottage gardens with outbuildings and a car barn
High Crest House covers an impressive 9384sq ft, with almost three acres of grounds including a tennis court and summer house enclosed by electric gates
A six-bedroom farmhouse with separate accommodation in converted stables. Situated in the village of Church Aston, within walking distance to the market town
A two-bedroom flat with under-heated walnut floors and bespoke built-in storage. The Tube and Clapham Common are a short stroll away
A refurbished seven-bedroom townhouse with staff quarters, cinema room, superb gym, steam room and plunge pool
A minimnalist four-bedroom home designed to the highest spec, featuring glass walls and a kitchen space lit by a glass roof
Hibernate during winter and make your living during the summer at this busy guesthouse with panoramic sea views, in the village of Lynton
A four-bedroom penthouse next to the Tate with direct views of St Paul's from two floors of luxurious living space
A four-bedroom detached home surrounded by spacious gardens and woodland, close to New Pudsey
An 18th-century, three-bedroom home near Langstone Harbour built from ships beams with vaulted ceilings and wood burning stoves
A five-bedroom semi-detached home with a mix of period and modern features in a popular and convenient location
This five-bedroom red-brick beauty overlooks the village green and sits in just under two acres of land
A three-bedroom villa with self-contained flat, minutes from Lake Windermere
A five-bedroom Victorian home with four receptions, superb gardens and paddock in Pembury
An eight-bedroom house on the south side of the The Green with cinema, wine cellars and summer house
This 17th century beauty is full of rustic cosiness, while the detached home office means you can also run a business