Yes, giving your child what they want for their birthday or another occasion is one of the greatest joys life has to offer. But what if all they want is a pack of Pokémon stickers? What will you do with the rest of the money you set aside for their Yuletide joy? Or maybe they’re the type to love a toy intensely, only for you to find it in the kitchen bin two days later. Is there a more constructive way to give?
Well yes, there is. With the cost of living seemingly rising inexorably up, and with university fees and house deposits going up with them (and pension annuities down) it could be that the best gift you can give is contributing to some sort of long-term savings fund. They may not appreciate it now, but they’ll thank you when faced with a student loan statement and a mortgage.
Junior ISAs are very similar to adult ISAs in that they offer a tax-free wrapper for savings and investments that can be topped up by a specified maximum every year.
But whereas an adult ISA has separate fixed allowances for stocks & shares and cash, a Junior ISA has a single allowance – currently £3,720 – that can be all cash, all investments, or any mix between the two. All interest and profits are completely free of income tax and capital gains tax, making it the most tax-efficient way of building a nest egg for your child.
And the earlier you start, the larger the sum they receive once they reach 18. For example, if you started a Junior ISA this year for your 1 year old daughter, assuming 5% growth (stocks can go down as well as up remember), and that ISA rules don’t change in the future, you could amass a lump sum of around £27,500 for her 18th birthday.
If your child already has a Child Trust Fund (and if they were born between September 2002 and January 2011 the government will have automatically set one up for them) then unfortunately you won’t be able to open a JISA for them.
Child savings account
A more flexible option is a children’s savings account, most of which operate just like normal savings account rather than having the money locked away until their 18th birthday like with a JISA.
This could be good for instilling a savings habit if you chose to give control of their money to them, or it could be useful for any expenses or emergencies along the way.
Children are subject to the same tax allowances as adults, but presumably won’t be earning anywhere near them. As such if you do open a savings account for them, be sure to fill out an R85 form so they receive gross interest (pre-tax).
Some fixed term options are available, and as with adult products, these tend to offer higher interest rates than instant withdrawal options.
An investment fund offers the possibility of larger returns, and an opportunity to teach them about the stock market when they’re older. Although stocks may go down as well as up, and so are riskier than a standard savings option, the very long term nature of investing for your child’s future protects you against most short term fluctuations. After all, Warren Buffett famously holds shares over a number of years, and he’s the 4th richest man in the world. And investment arguably protects better against inflation.
Picking stocks may be fun, but this is your child’s future we’re talking about; so handing management of the fund to a professional manager, most likely through a mutual fund, is probably a good idea. Index funds – which track the top companies in the market rather than picking individual businesses – are the lowest risk way of investing, and often outperform actively managed funds.
Thinking about their retirement when they’re little higher than your knee may seem strange, but when the pensions minister Steve Webb admits the state pension provides a “bare minimum” income – and the apple of your eye stands to live far longer than you – it might just be the best idea you’ve ever had.
As a parent you can contribute £3,600 per year into a pension on your child’s behalf, with government tax relief meaning that only costs you £2,880 – neatly sliding in at just under the £3,000 annual gift limit for inheritance tax.
The disadvantage of saving into a pension on their behalf means your child won’t be able to access the money until they’re at least 55, depending on how much pensions rules change in the meantime. But saving for retirement can be a considerable headache, particularly with the rising cost of care and increased lifespans. Easing that burden could make a real difference financially during their working life.
A financial gift may not be the most exciting present. But like most things you do for them, they’ll thank you when they’re older.