Profitable presents to give the children years of fun
Gold, not frankincense or myrrh, is the wisest gift
Saturday 03 December 2005
o far, the launch of the child trust fund, Gordon Brown's big initiative to get families saving, has been a hit-and-miss affair. Under the scheme, parents of children born since 1 September, 2002, get at least £250 to invest on their behalf - but only half the two million or so vouchers issued have so far been cashed.
However, Christmas is an excellent time to encourage children to start thinking about savings. Parents, relatives and friends can contribute to child trust funds on kids' behalf, or put money into a wide range of other investments. Even small gifts can become hugely valuable by the time children reach age 18.
CHILD TRUST FUNDS
Parents of all the children born since 1 September, 2005, should have been sent vouchers worth £250 - rising to £500 for children in low-income families. These vouchers must be used to open an account with a registered child trust fund provider - the information pack sent out with the vouchers includes a full list of the companies that participate in the scheme.
Once the account has been open, parents, friends and families can make additional contributions of up to a maximum of £1,200 a year. The plans grow tax-free and the Government has pledged to make a top-up payment when children reach age seven, though it has not yet said how much.
Most banks and building societies offer savings products aimed specifically at youngsters, but choose the account paying a decent interest rate. " Many accounts offer all sorts of gimmicks for kids but there is no substitute for earning decent interest," says a spokesman for Moneyfacts, the savings market analyst.
For example, HSBC's Live!Cash account for 11- to 15-year-olds offers a free personal organiser and a voucher for a free CD single, but pays just 3.93 per cent a year. Chelsea Building Society's Ready Steady Save account, on the other hand, offers no freebies, but pays 4.85 per cent.
Also check what your local building society offers - many have special deals available only to local residents that can be very competitive. Cambridge Building Society, for instance, pays 4.75 per cent on its First account.
Children's accounts can be an excellent way to teach kids about the value of regular savings, with several providers offering good deals to those who pay in money each month.
You can open an account with a small sum, then children can add their own money to get a really good deal. Halifax's Children's Regular Saver is offering a fixed rate of 10 per cent for the next 12 months to kids who pay in at least £10 every month.
Income earned on cash given to children by their parents counts as mum's and dad's money for tax purposes unless it totals less than £100 a year. On other gifts, the income will be taxable, but children get their own personal allowances - £4,895 this year. If your child will make less than that, ask your bank or building society for Inland Revenue form R85 so it can pay interest tax-free.
NATIONAL SAVINGS BONDS
You can invest up to £3,000 in a National Savings & Investment (NS&I) Children's Bonus Bond. The bonds are five-year products - take the money out early and there will be a loss of interest - and Issue 19 pays a fixed rate of 3.65 per cent a year.
As the Government-backed savings bank, NS&I rarely pays as much interest as private-sector providers, though this rate is tax-free and is therefore worth considering for children who do pay tax on their income - particularly the handful of kids who are on the 40 per cent higher rate. After each five-year term, the cash can be rolled over into a new Bonus Bond, until children reach age 21.
You don't have to stick to NS&I children's products. There's nothing to stop you giving kids Index-Linked Certificates - available over three- and five-year terms - or opening an NS&I Investment Account on their behalf. However, the rates payable on these products are not particularly attractive.
FRIENDLY SOCIETY BONDS
Friendly societies such as Liverpool Victoria, Royal Liver and The Children's Mutual offer savings plans for children, usually investing in a mix of assets.
Each child is limited to one plan and you can't invest more than £270 as a one-off payment, or £25 a month. After 10 years the plan can be cashed in or reinvested.
The returns on friendly society bonds are tax-free, but will depend on the performance of the underlying assets, including the stock market.
According to Money Management magazine, a monthly investment of £9 in a typical bond over the past 10 years would have produced a maturity value of £1,656, an annual return of 7.6 per cent.
STOCK MARKET FUNDS
Investing for young children - assuming they won't get the cash until they are at least age 18 - is a long-term pursuit.
And over the past 100 years, the stock market has outperformed all other asset classes over longer periods, so shares are an obvious gift for kids if you want to maximise the returns they earn.
In practice, the best way to give children a stock market investment is to put money into a professionally run fund that is registered in their name.
You can invest in any unit or investment trust on a child's behalf, but many people use the specialist regular savings plans for children that are offered by a range of investment companies.
One advantage of these plans is that providers generally make all the administration easier. You may choose to hold the funds as designated investments - in which case you may have to pay tax on income and gains - or in trust, where the tax treatment may be more beneficial, but controlling the investment can be more fiddly.
Investment trust companies, in particular, take saving for children very seriously. Alliance, Baillie Gifford, Close Finsbury, Edinburgh, Foreign & Colonial, Glasgow, Henderson and Scottish all offer kids' investment plans, offering access to most of the trusts they run within a packaged product at low cost.
Patrick Connolly, of the independent financial adviser John Scott and Partners, says investment trusts can offer a really strong deal, though you should remember to move money out of equities as time passes in order to reduce risk.
"The best place to save for children will depend upon the individual circumstances involved, the return required from the investments, the time period and the desired level of risk," says Connolly. "If the investment is for an 18-year period - particularly if it constitutes a series of regular premiums - then it would make sense to invest in equities."
How about this for the ultimate long-term Christmas gift?
Parents and other relatives can invest up to £3,600 on behalf of a child in a stakeholder pension. Pension contributions qualify for tax relief, so investing the full amount on a child's behalf actually costs a basic-rate taxpayer just £2,808.
The benefits of very long-term investment can be huge. Investing child benefit of £17 a week in a pension for a child would produce a fund worth a total of almost £16,000 at the age of 18, even without any investment growth or any increases in the value of the benefit. By age 65, that could produce a pension of £360 a month in today's money.
The minimum investment you can make in premium bonds is £100, and parents or grandparents can buy them for children who are under the age of 16. The good news is that the money is safe - the bonds can be cashed in at any time at their face value.
However, the odds of winning the £1m jackpot are poor. And the prize money paid out by National Savings & Investments on premium bonds equates to an interest rate of just 3 per cent; so unless you have a child who is luckier than the average, this is not a great deal.
Although the odds on winning the jackpot are shorter on the national lottery than with premium bonds, this is even more of a gamble because losing tickets have no value. Christmas subscriptions to the main draw are available as gifts, but players must be 16 years of age, or over.
If you want to give a child something with both investment value and immediate appeal, alternative investments such as fine wine or rare stamps (opposite) can prove a good option, as long as you buy from reputable dealers in order to avoid rip-offs and scams. Many auction houses have investment departments that deal in one-off sales.
Try Stanley Gibbons ( www.stanleygibbons.com) for stamps, for example. It points out that the SG 100 Index of stamps with investment value is up by 58 per cent over the past eight years, so the right present could grow in value, while providing a collector with short-term pleasure.
Alternatively, Vectis ( www.vectis.co.uk) specialises in rare toys. For example, rare British teddy bears have doubled in value over the past five to 10 years and you can get £5,000 to £7,000 for the best examples.
Add a zero to the price for teddies made by the vintage manufacturer Steiff. At this end of the market, however, these items stop being toys - once they are unwrapped, make sure that you don't let the kids anywhere near them.
Finally, for older children, think about something that will brighten up their rooms. Modern artwork can prove to be a good investment for the long term and children can enjoy it for years to come.
The Affordable Art Fair (020 7371 8787, www.affordableartfair.com) specialises in work that costs less than £3,000, such as the painting (left), Symmetry by Eddy Hunter.
Want 10 per cent on your savings? That's child's play
Ros Somerville-Jones opened a Halifax Bank Children's Regular Savings Account on behalf of her son Ethan, 9, earlier this year. The account pays an annual rate of interest worth 10 per cent, as long as the family puts money into it every month.
Ethan already has another children's savings account, but the family were attracted to the high rate of interest on offer at Halifax, so they encouraged Ethan to apply for the deal when it was launched earlier this year.
They have subsequently set up a standing order so that a bit of Ethan's cash is transferred to Halifax every month, in order to drip-feed cash in and qualify for the conditions of the account.
Ros says Ethan enjoys saving money regularly and takes a keen interest in how his interest is building up.
"He was very excited about going to the bank to open the account in the first place," Ros says. "Now he likes to know the money is there gathering interest on his behalf and he keeps asking how much it is worth."
Ros says the account will be a useful source of cash when he is older and needs money for a deposit on a home or for university, although Ethan currently reckons he's more interested in spending the money on his first car, which he thinks will almost certainly be a top-of-the-range Lamborghini.
In the meantime, saving money regularly in this way is teaching Ethan useful lessons about money, Ros believes.
"Whenever he gets money from friends or relatives at Christmas or on his birthday, I try to persuade him to spend half of it and to save half for the future," she says. "It's really important to teach him to learn about the value of saving and this is a good way for him to understand how money matters actually work in real life."
* The gold price has broken through the $500-an-ounce mark in recent days, hitting its highest level since 1983. But analysts believe there may be further gains to come, with the market even getting as far as testing the $850 record price for gold over the next two to three years.
* It is possible to buy physical gold as an investment that you can then give as a Christmas present - a financial gift that can actually be wrapped up. And the advantage of buying gold in this way, rather than in the form of jewellery, is that you don't have to pay VAT on the purchase.
* Chard, the Blackpool-based gold trader (see www.chards.co.uk) sells gold bars, kruggerands, sovereigns and coins that you can give as presents which may increase in value over the coming years. Prices start from a few pounds for the smallest examples.
* Alternatively, dealers such as Numis (see www.numis.co.uk) specialise in gold coins, which can also be an interesting gift with investment value, or you can buy directly from the Royal Mint (see www.royalmint.com).
The best financial presents for £50, £250 or £1,000 - what the experts recommend for children this Christmas
* If you have £50 to spend this Christmas: Sue Hannums of independent financial adviser Chase de Vere says family or friends thinking about investing a small sum can, for once, afford to worry less about getting absolutely the best possible interest rate on a cash savings account. " Why not choose an account that comes with freebie gifts - you'll only lose a few pennies in interest and you'll have something to actually hand over," says Hannums. "Being able to give something in addition to the account itself is a good way of making the concept of savings real." Halifax Bank's Save4it account pays 4.8 per cent annual interest - which anyway puts it close to the top of best-buy tables - and also comes with a free coin bank, kit bag and wallet.
* If you have £250 to spend: "At this level of gift, you can give a child a lump sum investment in a stock market fund," says Ben Yearsley of independent financial adviser Hargreaves Lansdown, who believes children are never too young to start investing in stocks and shares. " If you want a traditional fund, Invesco Perpetual Income would be a great choice - Neil Woodford is an excellent manager who has shown he can outperform over many time periods and children will be able to watch the value of their investments grow."
Alternatively, says Hannums, £250 would take you past the £100 minimum investment in premium bonds. "This is a popular gift because bonds are a bit more fun than traditional savings products," she says.
* If you have £1,000 to spend: "A sensible, low cost approach would be a large international investment trust such as Scottish Mortgage or Monks, both managed by Baillie Gifford, which offers children's savings plans within which the fund can be held," says Patrick Connolly, of independent financial adviser John Scott & Partners. Buying stock market investments can work well for very young children who have the advantage of a long-term perspective, but Connolly suggests the investment will need to be revisited in the future as the child gets older and nearer to cashing it in.
"As the investment amount increases and the time remaining reduces it would make sense to take some of the money from equities and invest in other asset classes that are less volatile."
Some people may wish to split the investment between something relatively safe, such as Connolly's suggested funds, and slightly more racy assets that could outperform over the long term.
"I would look to the East - either a Far Eastern fund or an emerging markets fund," says Yearsley. "I would suggest either First State Global Emerging Markets Leaders or Aberdeen Far East Emerging Economies."
Independent Partners; request a free guide on NISAs from Hargreaves Lansdown
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