Giving Christmas money to your kids
Despite the thought and energy that goes into selecting toys for children at Christmas, more than a third (37%) of Christmas toys and presents don’t make it past the end of January, according to The Children’s Mutual. Back in 2008, the children’s investment provider conducted a thought-provoking piece of research that found that a staggering £1.2 billion is wasted each year by family and friends buying gifts that get broken or discarded long before we give up on our New Year’s resolutions.
Parents now spend £3,186 in total on Christmas presents for each child, on average, up to the age of 18, according to research from Halifax in 2015.
The average spend on each child is £177 a year. It seems sensible to consider if this is justified and whether the money could go towards a longer lasting legacy instead.
Many parents, grandparents and other family members choose to give cash instead or in addition to presents. On average, children receive £120 in cash at Christmas from parents, friends and relatives, according to the Halifax study.
Perhaps have a ‘saving for children’ conversation with all family members. Can grandparents contribute? Many want to, but are too shy or embarrassed to raise the subject. Small monetary gifts at Christmas are unlikely to fall foul of the inheritance tax (IHT) rules. You can give away gifts worth up to £3,000 in total in each tax year and these gifts will be exempt from IHT when you die. You can also make small gifts up to the value of £250 to as many people as you like.
If you all agree to put a small amount of money into a child’s savings account every Christmas and birthday, this could amount to thousands of pounds over his or her childhood.
The advantage of giving cash is that it can be turned into an educational money tool. Whatever account you choose, it’s important that you involve the child in the decision and management of the account so that they can see how the money grows over time.
The type of gift that you give will depend on how much you want to contribute, as some investment products have fees that would eat up smaller amounts of cash over time.
Cash gifts of less than £100 could be used to open a savings account, or to top up an existing investment such as a Junior Isa. If you have larger sums of £500 - plus or want to start making smaller but regular contributions, then consider setting up higher-risk investments for the long term.
Here are five options for a child at Christmas – and our specific recommendations in each area.
Junior cash Isa account
A Junior individual savings account (Jisa) is an option, but while all the family can contribute this type of Isa can only be opened by somebody with parental responsibility for the child. It is only this person, known as the registered contact, who is able to give investment instructions and who will receive all the documentation. Also, there are annual maximum limits on how much you can deposit in a Junior Isa – it is £4,080 in the 2016/17 tax year. The child can’t withdraw the money until they turn 18.
The best rate for a Junior Cash Isa is from Coventry, which will pay 3.25% AER. Nationwide’s Smart Junior Isa and the Halifax Junior Cash Isa both pay 3% AER.
Children's savings account
If you just want to make a straightforward deposit for a child that can then be topped up on an ad hoc basis in future, then the best deals depend on the age of your child, as some are restricted to older children. Here are a couple to consider that have easy access and don’t require regular deposits.
The Halifax or Bank of Scotland Young Saver account pays 2% AER without any bonuses and allows unlimited withdrawals. Once the child reaches seven, they can have a cash card to make their own withdrawals.
If your child is between 11 and 18 years old, they can open a Santander 123 Mini Current Account. It pays 3% AER on balances from £300 to £2,000. The child can choose a cash or visa debit card to go with it.
For more ideas on savings accounts for children see Moneywise's Best savings rates this week.
Premium Bonds have long divided opinion with some people thrilled by the chance of winning £1 million – the biggest prize available – while others deride them for paying no interest (for more on this read Is it time to ditch your Premium Bonds?).
This year the prize rate has been cut but the effective (it’s not guaranteed) interest rate of 1.25% applied to the prize pot still isn’t that far short of the best cash rates you can get on the open market. There is still the feel-good factor of winning monthly prizes at odds of 30,000 to
one, which makes Premium Bonds unique to the UK savings landscape. Plus there’s the chance to make your child a millionaire and the fact your money is 100% secure, being backed by the UK government.
Until the child’s 16th birthday the parent or guardian nominated on the application looks after the Bonds, regardless of who buys them. NS&I will send the Bond record, any prizes won and payment for cashed in Bonds to the nominated parent or guardian until the child is 16. Parents or legal guardians can apply online, by phone or by post. Grandparents and great grandparents can only apply by post.
Visit Nsandi.com/premium-bonds or call 0808 5 007 007 for more information.
Investment junior Isa
Fidelity’s Junior Isa won Best Investment Junior Isa in Moneywise’s Children’s Savings Awards 2016 and offers an extensive range of more than 2,600 investment fund
options. To help with your investment choice, see Moneywise’s First 50 Funds.
Vanguard LifeStrategy 40% Equity Fund would make a good core low-cost holding for a child. You could top up the investment with actively managed funds, such as CF Woodford Equity Income, Marlborough UK Micro Gap Growth and Stewart Investors Asia Pacific Leaders.
Investment trust savings scheme
If you have extra money to invest and have used up your own Isa allowance too, or if you want greater access to the money, a children’s investment plan can offer access to a range of investment trusts at a low cost. According to the Association of Investment Companies, a lump sum investment of £1,000 made 18 years ago in the average investment trust or company could be worth £5,040 to 30 October 2016.
Baillie Gifford’s Children’s Savings Plan won best children’s investment scheme in Moneywise’s Children’s Savings Awards 2016. It offers four diversified global and three specialist funds.
Among these, we think Scottish Mortgage, a member of the Moneywise First 50 Funds, is ideal for children’s savings, giving broad access to UK and international stock markets with very low charges.
Investment trusts are companies that invest money in other companies and whose shares are listed on the London Stock Exchange. As with unit trusts, private investors buying shares in an investment trust are buying into a diversified portfolio of assets (to reduce risk), which is managed by a professional fund manager. Investment trusts differ from unit trusts in two important ways: they are listed on the stockmarket and so are owned by their shareholders and are closed-ended funds with a finite number of shares in issue. This means the share price of investment trusts might not reflect the true value of the assets in the company (known as the net asset value, or NAV) and if the NAV value of a share is £1 and the share price in the market is 90p, the trust is said to be running a discount of 10% to NAV. But this means the investor is paying 90p to gain exposure to £1 of assets. Investment trusts can also borrow money and use this money to buy investments. This is known as gearing and a geared trust is thought to be more of an investment risk than an ungeared one.
Available from 1 November 2011, the Junior ISA will replace child trust funds (CFTs), which have been phased out. Junior ISAs will have a £3,000 limit and will be offered by high street banks, building societies and other providers that currently offer ISAs to adults. You can invest in either stocks and shares or cash. But, unlike CTFs, there will be no government contributions into each child’s savings pot. Money invested in Junior ISAs will be “locked in” until the child is 18, and the ISA will default to an adult one.
A form of National Savings Certificate, premium bonds are effectively gilt-edged securities: you loan your money to the government and, in return, it pays you for the privilege with a guarantee it will return your capital at a specified date. Where premium bonds differ is that the interest payments (currently 1.5%) are pooled and paid out as prize money and you can get your cash back within a fortnight, with no risk. Launched by Chancellor of the Exchequer Harold Macmillan in his 1956 Budget, every single £1 unit has the same chance of winning and in May 2011, 1,772,482 winners (from a total draw of 42,539,589,993 eligible bond numbers) shared £53,174,500. The odds of winning are 24,000 to 1 and the maximum holding is £30,000 per person but it remains the only punt in which you can perpetually recycle your stake money.
The tax levied on the total value of your estate after you die. IHT has to be paid by the beneficiaries of your estate before they can receive any of the money from it. The money can’t be taken from the value of the estate _– it has to be paid before any money can be released. There is an IHT threshold – known as the “nil-rate band” – below which no tax is levied (£325,000 in 2011/12). Any amount above the nil-rate band is subject to tax at 40%. If your estate totals £600,000, there is no tax on the first £325,000; however your estate will pay 40% tax on the remaining £275,000, a total of £110,000. Prudent tax planning can reduce your IHT liability, so always consult a specialist solicitor.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.
An account opened with a clearing bank (few building societies offer current accounts) that provides the ability to draw cash (usually via a debit card) or cheques from the account. Some pay fairly minimal rates of interest if the account is in credit. Most current accounts insist your monthly income (salary or pension) is paid directly in each month and they offer a number of optional services – such as overdrafts and charge cards – which are negotiable but will incur fees.
Issued by a bank as part of a current account and, in a nutshell, serves as electronic cash. Unlike a credit or charge card, where you get an interest-free period before you have to settle the bill, the funds spent on a debit card are withdrawn immediately from your current account. Unless you’ve arranged an overdraft, if you don’t have the cash in the account, you can’t spend it.
Where APR is the rate charged for money borrowed, Annual equivalent rate is how interest is calculated on money saved. The AER takes into account the frequency the product pays interest and how that interest compounds. So, if two savings products pay the same rate of interest but one pays interest more frequently, that account compounds the interest more frequently and will have a higher AER.
There are limits to how much you can invest in any tax year. For 2011/12, the limit is £10,680. Of that, the maximum you can invest in cash is £5,340 and the balance of £5,340 can be invested in shares (individual company shares or investment funds). If you don’t take the cash ISA allowance, you can invest up to £10,680 into a stocks and shares ISA.