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.

Low risk

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

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.

High risk

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.