Tax-free savings gifts will go on working long after RoboSapien grinds to a halt

Click to follow
The Independent Online

With only 12 shopping days left till Christmas you may be panicking that you've still not bought your offspring the latest RoboSapien robot or Bratz doll they've been hankering after for the past few months.

With only 12 shopping days left till Christmas you may be panicking that you've still not bought your offspring the latest RoboSapien robot or Bratz doll they've been hankering after for the past few months.

But if you can't face the crowds this year, why not think about buying your loved ones a present that will last long after the excitement of the day has worn off?

A financial gift such as a savings or investment plan may not bring a look of glee to your children's faces on Christmas morning. But they will thank you for it later when it has accrued far more value than any toy or gadget would otherwise have done.

Four in 10 parents admit they would prefer to put some of the money they spend on Christmas presents towards saving for their children's future instead, according to research from the Association of Investment Trust Companies.

If you are looking at investing for the short term - up to five years, say - you are best off leaving the money in a decent cash savings account, recommends Anna Bowes from independent financial adviser Chase de Vere.

Most banks and building societies offer accounts aimed at children, which you can open with as little as £1.

These are low-risk vehicles, but you do need to look at who is offering the best interest rates - even if your child is only interested in looking at who is offering the best freebies such as piggy banks and vouchers for money off on day trips.

Ms Bowes picks out Alliance & Leicester's First Saver account, which pays 5.25 per cent a year. She also likes Halifax's Monthly Saver, a regular saver account paying 5.55 per cent.

"But you have to make 11 out of 12 of the payments each year or you risk facing severe penalties," she warns.

Money held in children's names will be tax-free as long as - like everybody else - they don't breach the annual £4,745 income tax allowance.

To ensure the interest earned is paid without having tax deducted on savings of less than £4,745, you will need to fill in an R85 form. This is available from all banks, building societies and tax offices.

Watch out, though; if the annual interest earned from your own contributions to your little treasure's account tops £100, it will be taxed at 20 per cent basic rate and be deducted from your child's account.

You could get around this problem by asking grandparents, godparents and generous friends to contribute to your child's account. All interest is then tax-free.

Another option is a tax-exempt savings plan run by a friendly society.

"This is for parents who want to save regularly over the long term. You typically invest a lump sum over a minimum of 10 years," says Suzanne Greener from financial information company Moneyfacts. When the plan matures, the plan can be cashed in or reinvested.

If you paid £25 a month for the next 18 years into a baby bond from the Children's Mutual friendly society, for example, this could grow into £8,640 assuming a modest growth rate.

Looking for credit card or current account deals? Search here

Comments