With the festive season in full swing, many people will be wondering what to get the little ones in their family this Christmas. One way to steer clear of the shopping frenzy and give a gift that will last longer than any noisy toy or plastic tat is to put money aside for their future.
‘As well as being a more prudent present than another short-lived “must-have” item, investing on behalf of children at a young age can be a great way to start building a pot for large future costs, such as university or a house purchase,’ says Joe Roxborough, a chartered financial planner at Ascot Lloyd.
There are many ways in which you can make a financial gift to a child, whether as a simple one-off cash gift or by funding an investment on their behalf. As always, there are two key considerations: time horizon and the appropriate level of risk.
‘Investors should think carefully about these factors – keep the recipient in mind, not the donor,’ says Michael Owen, financial planning director at Brooks Macdonald. ‘That means cautious parents or grandparents should not rule out stock market investments for their children or grandchildren, if the time horizon can support this. For those with a timeframe of five years or more, equity-based investments have traditionally provided better overall returns than cash deposits.’ The compounding effect from reinvesting growth year-on-year is to the eventual size of the pot.
‘A lump sum investment on behalf of a child is one of the best gifts you can ever give,’ says Oliver Smith, a portfolio manager at IG Smart Portfolios. ‘Over the past 35 years an investment in the FTSE All-Share index with dividends reinvested has gone up more than 21 times (averaging 9.3 per cent a year). Within that time the best 10-year period had an annualised return of 20.4 per cent, while the worst – investing at the top of the market in extremely powerful and can make a big difference 1999 and selling at the bottom in March 2009 – had a loss of just 0.6 per cent.’
Stock market investing doesn’t suit all budgets and circumstances, though, so let’s look at a variety of options for children – from those that give easy access and the least risk to capital to those that tie your money up for the long term and carry investment risk.
Dedicated children’s savings accounts often boast the most generous interest rates on the high street, with the top rates often offered to those who commit to making monthly contributions. ‘These accounts hold money in the child’s name and can be a good way to encourage children to save,’ says Adrian Lowcock, an investment director at Architas.
HSBC pays 2.75 per cent variable on deposits of £10 or more for children aged 7 to 17, while Saffron Building Society pays 4 per cent fixed for a year for monthly contributions of £5 to £100 for children from birth to age 15.
Both of these allow full access to capital, so are useful for older children who want regular or ad hoc access, sometimes with parental approval (HSBC requires a parent’s or guardian’s signature for withdrawals of £50 or more for the under-11s).
Children have tax allowances like adults and therefore the first £1,000 of interest on savings per year is tax-free, unless the money comes from parents, in which case only the first £100 is tax-free.
For the under-16s, parents and grandparents can buy Premium Bonds, run by National Savings & Investments (NS&I), in the child’s name. Instead of each bond paying interest individually, they are entered into a monthly prize draw with the chance to win between £25 and £1 million.
‘On the plus side, all winnings are tax-free, but there’s no guarantee you’ll win anything at all,’ says Marlene Outrim, managing director of UNIQ Family Wealth. ‘Some children might like the idea of hopefully winning a large sum. In my experience, you need a reasonable number of bonds to have a chance of getting a number of small wins, which might be quite a nice surprise.’
From 1 December 2017, the odds of a £1 bond winning have improved to 24,000 to one. In addition, the annual Premium Bond prize fund interest rate has risen to 1.4 per cent following the rise in the bank base rate, up from 1.25 per cent in May. The maximum holding is £50,000, and you can cash in your bonds without notice or penalty.
An alternative that has been garnering a growing following is the Windfall Bond from the Family Building Society. Each bond costs £10,000 and offers monthly prizes of between £1,000 and £50,000. Although the odds of winning are worse (64:1 versus 3:1 for £10,000-worth of Premium Bonds), the Windfall Bond does pay interest – at a variable rate equivalent to the Bank of England base rate, currently 0.25 per cent.
You have to be 18 to buy a bond, so an adult would have to hold one on behalf of a child, but Family Building Society is considering the introduction of a children’s version. Accounts can be closed with 35 days’ notice.
Ben Willis, head of research at Whitechurch Securities, believes the Junior Isa (Jisa) is probably the most appropriate vehicle for investing for children, due to its flexibility and tax efficiency. Money held in a Jisa grows free of all tax, and can be rolled straight over into a grown-up Isa when the child comes of age.
Maike Currie, investment director for personal investing at Fidelity International, is directing family and friends to her one-year-old daughter’s Jisa when they ask what they should get her for Christmas. ‘Unlike the latest toy fads, investing into a Jisa isn’t just for Christmas; it is a gift with longterm benefits,’ says Currie. ‘The money is locked away until your child reaches 18, which means that even a small investment can grow to a sizeable sum due to the magical power of compounding.’
Although parents have to open a Jisa on behalf of their kids, anyone can contribute – up to £4,128 in total in the 2017/18 tax year. This can be held in cash, stocks and shares, or a combination of the two.
The latest figures from HMRC show that cash remains the most popular: £525 million was saved into 569,000 cash accounts during the last tax year, compared to £333 million in 225,000 stocks and shares accounts. However, the best cash Jisas are only level-pegging with inflation, which rose to a five-year high of 3 per cent in September, meaning the best you can hope for is that the money holds its value.
Those gifting money to children, particularly young ones with an investment horizon of 10 years or more, can afford to take investment risk – and stand to receive bigger rewards.
If you tucked away £50 per month into a stocks and shares Jisa tracking the FTSE All-Share index over the past five years, for example, the pot would have grown to £3,813, compared to just £3,013 for a cash Jisa, figures from M&G show. ‘This is even more important to consider in an environment where prices are rising faster than savings rates,’ says investment director Ritu Vohora.
There are quite a few investment Jisa providers, including our sister company Interactive Investor, so shop around. According to website Moneytothemasses.com, some of the best choices for low monthly payments include Scottish Friendly, Interactive Investor, AJ Bell and Hargreaves Lansdown.
Currie recommends using a ‘set and forget’ fund, such as a low-cost global tracker – the cheapest share classes of L&G International Index Trust (which tracks FTSE World ex UK index) and Fidelity Index World (which tracks the MSCI World index) both cost 0.13 per cent – or an actively managed fund with a global spread of invest ments, such as Rathbone Global Opportunities or Invesco Perpetual Global Equity Income.
Investment trust savings schemes for children are low-cost and, unlike Jisas, don’t have contribution limits or access restrictions. However, the flipside is that they can be less tax-efficient as there’s no built-in tax wrapper.
‘For those willing to take some risk, there are a number of very good schemes allowing access to lower-cost investment trusts that have a broad spread of underlying investments,’ says Owen at Brooks Macdonald. Most schemes accept lump sums from £100 to £250, or regular contributions from £25 per month (see table).
Investment managers usually offer the choice of using a designated account or bare trust when investing for a child. With the former, you retain control of the investment, though it is treated as belonging to you for tax purposes. With the latter, the designated trustee (often a parent) automatically loses control of the investment when the child turns 18 (16 in Scotland). However, the investment is treated as the child’s for tax purposes, making this option particularly useful for higher-rate taxpayers or those adults likely to make full use of their capital gains tax allowance.
Another benefit of a bare trust is that the investment is treated as a potentially exempt transfer for inheritance tax purposes, meaning it falls out of your estate provided you live for at least seven years after making the gift.
Another way to give a child a financial leg up in life is by funding their pension. ‘Contributing to children’s pensions, at any age, gives them a great head start as they can’t access the funds until they are much older – currently 55 years old,’ says Richard Morley, an investment manager at Brewin Dolphin.
Up to £2,880 can be saved in a pension for a non-earner per tax year. Basic-rate tax relief means this is grossed up to £3,600. If that lump sum returned 5 percent a year, it would be worth £42,000 in 50 years’ time or £111,000 in 70 years’ time, figures from Architas show.
Jason Hollands, managing director of Tilney, says: ‘Opening a pension for a child may seem counterintuitive, given that the pot will not be accessible for decades, but the benefit of a top-up by the state and returns rolling up tax-free for the very long term is really considerable: it could be one of the best financial gifts you give.’
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