Save, make, understand money


Six ways to gift to children without handing over cash or toys

Paloma Kubiak
Written By:
Paloma Kubiak

While it may not be as fun as unwrapping presents, financial gifts can set up your little ones for life, not just keep them entertained over Christmas. Here are six ways to help invest for their future.

Children may not be as excited with news that you’ve saved or invested money on their behalf, but if you loathe adding to the toy pile, this can be a good option for parents, family members and friends.

While this year has been tough for families, with many wanting to reward children for the upheaval suffered, research from St. James’s Place (SJP) revealed that a fifth of children’s Christmas gifts are wasted each year, amounting to an average £760m worth of presents that are unused, unwanted, exchanged or thrown away across the whole of the UK.

With that in mind, here are six ways to help little ones onto the path of financial success…

1) Junior ISA

Up to £9,000 can be put into a Junior ISA (JISA) each tax year and the major pull of this product is that the savings and interest/profit are tax-free year after year.

Further, by saving for children from an early age, they will also benefit from the effects of compounding.

According to calculations by SJP, an annual contribution of £365 – equivalent to £1 a day, and less than the cost of the must have PS5 games console – invested every year from birth could turn into over £11,000 on the child’s 18th birthday.

JISA’s can then be rolled over into adult ISAs, maintaining the tax-free benefit for further years.

For those putting away money in a JISA, it is advised to do so via stocks and shares instead of cash accounts. However, the current top paying JISA is offered from Coventry Building Society, paying 2.95% AER, a much higher rate than offered for adult ISA holders.

2) Gold

Gold as a commodity is difficult to value as it doesn’t produce anything and doesn’t generate an income but demand for the precious metal has soared this year off the back of the pandemic-induced stock market volatility.

You could go down the gold coin route via The Royal Mint with many different ones to choose from ranging in value and age, with some being more collectable than others while some commemorate various events.

Or alternatively, The Royal Mint has just this week launched ‘Little Treasures’ – a digital gold savings account for children.

Adults can invest in fractional digital gold (to the nearest 0.001 ounce) for children by setting up monthly payments or making one-off deposits (minimum £25).

While the price can go up as well as down, investors have flocked to the ‘safe haven asset’, pushing it to a record high of £1,574 per ounce this year.

3) Premium Bonds

For years, these have been a popular present for children as the chance to win a million pounds in the monthly draw adds an element of fun and excitement.

Last year National Savings & Investments (NS&I) made it easier by giving aunts, uncles and family friends the chance to save for young children, so it was no longer just to be opened by parents, grandparents or legal guardians. It came after the minimum investment amount was halved to £25.

But as of December’s draw, the interest rate used to calculate the prize pool has been slashed from 1.4% to 1% and the odds of winning have also dwindled from 24,500 to one, to 34,500 to one, taking the shine off this product.

4) Pension

While Brits may be concerned about how to finance their own retirements, many may not be aware they can help children secure their golden years too.

Tens of thousands of children already have pensions set up for when they’re ready to retire and one of the big benefits of this method is access – the cash can only be accessed 10 years before retirement (currently 57 for access, 67 for state pension).

SJP said starting a pension for children as soon as they’re born can give them a head start and lead to significant sums for later life.

Even as non-taxpayers, children get basic-rate tax relief on contributions. This means a maximum of £2,880 a year is automatically grossed up to take account of tax at 25%, giving an annual investment of £3,600.

And with youth on their side coupled with the effects of compounding, by taking on more risk for investments, they could be in line for vast sums.

5) Cash savings

Children’s savings rates are more generous than the adult equivalents.

For example, the Halifax Kids’ Monthly Saver account (maximum 15 years of age) pays 3.5%, which allows savings of £10 to £100 a month per child. The rate is guaranteed for a year with interest paid at maturity before the account reverts to the Kids’ Saver account, currently paying 1.44% gross / 1.45% AER.

These accounts hold money in the child’s name and can be a good way to encourage children to save. Generally, banks and building societies require the parent or legal guardian to be involved in setting up the account as they’d need to provide ID such as a birth certificate, but anyone can contribute to a savings account on behalf of a child.

However, parents need to be mindful that children can only earn up to £100 in income each year on money or investments gifted to them by a parent. Beyond this amount, income is attributed to the parent so it’s potentially taxable, AJ Bell explains.

“This doesn’t apply to money gifted by a grandparent or other relatives, and even for parents you can get round this problem by using a Junior ISA, which allows tax-free income and gains to be accumulated,” Laith Khalaf, financial analyst at AJ Bell says.

6) Bare Trusts

Under a bare trust you (the trustee) make a gift which is held for a specified beneficiary (eg your child). Anyone can set up a bare trust. The beneficiary becomes entitled to the trust money at the age of 18; the trustee can manage the investments held within it until then, including withdrawing money – as long as it is for the benefit of the beneficiary, such as to pay school fees, for sports equipment or tuition, Kay Ingram director of public policy at LEBC Group explains.

“The investments are taxed at the child’s tax rate, which in most cases means no income tax or capital gains tax is payable, so long as the income and gains are below the tax-free allowances.

“There are no limits to the amount that can be paid into a bare trust, so they are ideal for larger one-off gifts in excess of the allowances for ISAs,” Ingram says.

Foresters Friendly Society provide a range of savings plans including their award winning Junior ISA*

*Yourmoney.com Investment Awards – Winner – Best Junior Investment ISA 2022.