Give your kids a financial gift at Christmas
My son has written his letter to Father Christmas and it’s been posted to the North Pole and despite my best attempts to rein him in, he has asked for a huge range of stuff this year from a nerf gun to a Nintendo Switch.
Unsurprisingly, one thing that didn’t make an appearance on his list was money.
He is only five, so I suppose the idea of him asking for some cash to put away for when he’s older is as likely as him getting that Nintendo Switch (zero chance).
But as Christmas present buying season gets into full swing, putting some money aside as a gift doesn’t seem such a bad idea. He may not appreciate it now, but in 13 years’ time, when he wants to go to university, travel around the world or buy a car, he’ll be grateful for a pot of money.
According to the Association of Investment Companies, an investment in the average investment trust 18 years ago would have more than quadrupled today, returning 311%.
Of course, investment trusts are just one type of fund that can be held in a junior ISA, which is a tax efficient way to save or invest for your child as all interest and earnings are tax-free.
You can also invest in open-ended funds within a junior ISA.
Analysis by investment platform AJ Bell shows parents generally invest in a mixture of active funds and passives in junior ISAs.
“A number have plumped for lower cost all-in-one funds, such as Vanguard Lifestrategy or AJ Bell’s passive funds, which spread the money across different markets and assets,” says Laura Suter, personal finance analyst at the platform.
She says Fundsmith Equity, Lindsell Train Global Equity and BMO Global Smaller Companies are the most popular funds for junior ISA investors, while Scottish Mortgage, F&C Investment Trust and Witan are among the most popular investment trust choices.
If you’d rather avoid the stock market, the best cash junior ISA rate is 3.6% from Coventry Building Society.
Only parents or guardians can open a junior ISA, but anyone can add money to it. The limit for the 2019/20 tax year is £4,368.
It’s worth remembering your child will get control of the money at 16 but can’t access it until 18.
Start a pension
If you’re worried about your child fritting away their junior ISA cash when they reach 18, another option is to open a pension for them.
With a junior SIPP (self-invested personal pension), they won’t be able to access the money until they’re 55 (57 from 2028).
Anyone can contribute to a junior SIPP up to a limit of £2,880 a year and get 20% tax relief, so it is topped up by the government to £3,600.
An added bonus is that the £2,880 a year contribution is below the £3,000 annual gift allowance for inheritance tax so would immediately fall outside the value of the donor’s estate, which could be good news for parents or grandparents.
A recent study by Penfold, a pensions scheme for the self-employed, found 48% of 18-25 year olds would prefer their parents to contribute towards a pension for their future rather than getting them a gift at Christmas.
Another gift idea is premium bonds, which are offered by National Savings & Investments (NS&I) and are backed by the government.
Rule changes this year mean anyone can buy premium bonds – parents, grandparents, aunts, uncles, friends – for any child of any age.
Previously, only parents and grandparents could buy the bonds for children under 16.
Premium bonds don’t pay interest but every month, all bonds are entered into a prize draw where bondholders can win prizes worth between £25 and £1m.
If you want to help your child learn how to manage their money, you could put some money in a current account as a present.
There are a whole host of children’s current account on the market and they work in the same way as adult accounts except for one important difference: they don’t come with an overdraft so your kids can’t rack up debt.
Many of them also restrict how much can be withdrawn from an ATM in one go and some even pay interest.
For example, Nationwide pays 1% on balances up to £1,000 and Santander pays 3% on balances from £300 to £2,000.