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

Arts and Entertainment
Gregg Wallace in Summer's Supermarket Secrets
tv All of this year's 15 contestants have now been named
Arts and Entertainment
Inside the gallery at Frederick Bremer School in Walthamstow
tvSimon Usborne goes behind-the-scenes to watch the latest series
Life and Style
A picture taken on January 12, 2011 shows sex shops at the Paris district of Pigalle.
newsThe industry's trade body issued the moratorium on Friday
News
Winchester College Football (universally known as Winkies) is designed to make athletic skill all but irrelevant
Life...arcane public school games explained
PROMOTED VIDEO
Arts and Entertainment
Could we see Iain back in the Bake Off tent next week?
tv Contestant teased Newsnight viewers on potential reappearance
Life and Style
Silvia says of her famous creation: 'I never stopped wearing it. Because I like to wear things when they are off the radar'
fashionThe fashion house celebrated fifteen years of the punchy pouch with a weighty tome
News
i100(and it's got nothing to do with the Great British Bake Off)
News
Angelina Jolie with her father Jon Voight
peopleAsked whether he was upset not to be invited, he responded by saying he was busy with the Emmy Awards
News
Bill Kerr has died aged 92
peopleBill Kerr appeared in Hancock’s Half Hour and later worked alongside Spike Milligan and Peter Sellers
News
news It's not just the world that's a mess at the moment...
Sport
footballPremiership preview: All the talking points ahead of this weekend's matches
News
Keira Knightley poses topless for a special September The Photographer's issue of Interview Magazine, out now
people
Voices
The Ukip leader has consistently refused to be drawn on where he would mount an attempt to secure a parliamentary seat
voicesNigel Farage: Those who predicted we would lose momentum heading into the 2015 election are going to have to think again
Arts and Entertainment
Cara Delevingne made her acting debut in Anna Karenina in 2012
film Cara Delevingne 'in talks' to star in Zoolander sequel
News
i100
Sport
Mario Balotelli pictured in his Liverpool shirt for the first time
football
Life and Style
tech
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

    Data Scientist (SQL,Data mining, data modelling, PHD, AI)

    £50000 - £80000 per annum + benefits+bonus+package: Harrington Starr: Data Sci...

    SAS Business Analyst - Credit Risk - Retail Banking

    £450 - £500 per day: Orgtel: SAS Business Analyst, London, Banking, Credit Ris...

    Project Manager - Pensions

    £32000 - £38000 Per Annum Bonus, Life Insurance + Other Benefits: Clearwater P...

    KYC Analyst, Birmingham - £200-£250 p/d

    £200 - £250 per day + competitive: Orgtel: KYC Analyst, Key Banking Client, Bi...

    Day In a Page

    Ukraine crisis: The phoney war is over as Russian troops and armour pour across the border

    The phoney war is over

    Russian troops and armour pour into Ukraine
    Potatoes could be off the menu as crop pests threaten UK

    Potatoes could be off the menu as crop pests threaten UK

    The world’s entire food system is under attack - and Britain is most at risk, according to a new study
    Gangnam smile: why the Chinese are flocking to South Korea to buy a new face

    Gangnam smile: why the Chinese are flocking to South Korea to buy a new face

    Seoul's plastic surgery industry is booming thanks to the popularity of the K-Pop look
    From Mozart to Orson Welles: Creative geniuses who peaked too soon

    Creative geniuses who peaked too soon

    After the death of Sandy Wilson, 90, who wrote his only hit musical in his twenties, John Walsh wonders what it's like to peak too soon and go on to live a life more ordinary
    Caught in the crossfire of a cyber Cold War

    Caught in the crossfire of a cyber Cold War

    Fears are mounting that Vladimir Putin has instructed hackers to target banks like JP Morgan
    Salomé's feminine wiles have inspired writers, painters and musicians for 2,000 years

    Salomé: A head for seduction

    Salomé's feminine wiles have inspired writers, painters and musicians for 2,000 years. Now audiences can meet the Biblical femme fatale in two new stage and screen projects
    From Bram Stoker to Stanley Kubrick, the British Library's latest exhibition celebrates all things Gothic

    British Library celebrates all things Gothic

    Forthcoming exhibition Terror and Wonder: The Gothic Imagination will be the UK's largest ever celebration of Gothic literature
    The Hard Rock Café's owners are embroiled in a bitter legal dispute - but is the restaurant chain worth fighting for?

    Is the Hard Rock Café worth fighting for?

    The restaurant chain's owners are currently embroiled in a bitter legal dispute
    Caribbean cuisine is becoming increasingly popular in the UK ... and there's more to it than jerk chicken at carnival

    In search of Caribbean soul food

    Caribbean cuisine is becoming increasingly popular in the UK ... and there's more to it than jerk chicken at carnival
    11 best face powders

    11 best face powders

    Sweep away shiny skin with our pick of the best pressed and loose powder bases
    England vs Norway: Roy Hodgson's hands tied by exploding top flight

    Roy Hodgson's hands tied by exploding top flight

    Lack of Englishmen at leading Premier League clubs leaves manager hamstrung
    Angel Di Maria and Cristiano Ronaldo: A tale of two Manchester United No 7s

    Di Maria and Ronaldo: A tale of two Manchester United No 7s

    They both inherited the iconic shirt at Old Trafford, but the £59.7m new boy is joining a club in a very different state
    Israel-Gaza conflict: No victory for Israel despite weeks of death and devastation

    Robert Fisk: No victory for Israel despite weeks of devastation

    Palestinians have won: they are still in Gaza, and Hamas is still there
    Mary Beard writes character reference for Twitter troll who called her a 'slut'

    Unlikely friends: Mary Beard and the troll who called her a ‘filthy old slut’

    The Cambridge University classicist even wrote the student a character reference
    America’s new apartheid: Prosperous white districts are choosing to break away from black cities and go it alone

    America’s new apartheid

    Prosperous white districts are choosing to break away from black cities and go it alone