A pension pot or tax-free savings account is probably not top of your children or grandchildren’s wish-list to Father Christmas. But giving cash over toys this December could be worth thousands of pounds – even though they may have to wait years or decades to enjoy it.
If you’re giving to grandchildren, you may find their parents are grateful too. Seven in ten parents would consider including money and savings on their child’s wish-list to family members, new research from mutual Scottish friendly shows.
So instead of splashing out on a game or toy that a child will soon forget about, funnel that cash into a savings product for the ultimate gift – a generous nest egg when they reach adulthood or even retirement.
BUILD UP A NEST EGG WORTH THOUSANDS OVER THE YEARS
If you want to gift money that they can enjoy when they reach adulthood, consider a Junior Isa – also known as a Jisa.
These are tax-efficient wrappers where up to £9,000 a year can be saved or invested for a child. No interest or capital gains tax is due on wealth accrued. You can opt for a cash or stocks and shares version.
Putting £100 into a stocks and shares Jisa every Christmas from a child’s birth will land them a £2,989 nest egg by the time they reach 18. That is even if you don’t save a single penny more, according to calculations by investment platform Hargreaves Lansdown.
Nest egg: instead of splashing out on a game or toy, funnel that cash into a savings product for the ultimate gift
This assumes the stocks and shares held in the Jisa grow by 5 per cent every year – but remember, markets can fluctuate so there is an element of risk involved.
Jill Mackay, savings specialist at Scottish Friendly, says: ‘Let’s be honest, no child is going to look at the paperwork on a Jisa welcome pack with the same level of delight they would at the latest fad toy.
‘But you can still make it enjoyable. Wrap a smaller, cheaper physical gift such as a pot they can decorate themselves and seeds for flowers or vegetables they can plant.
‘This could be a foundation to help children understand how savings can grow over time with careful thought and consideration.’
The child can take control of the account when they’re 16, but can’t touch the money until 18. It’s a good lesson in nurturing wealth.
TURN £1,800 INTO £25,000 WITH A PENSION
Put their Christmas present into a pension and the rewards multiply even further.
While your child might find it hard to understand now, they’ll later appreciate the leg-up over their peers, who are only auto enrolled age 22, says Helen Morrissey, head of retirement analysis at Hargreaves Lansdown. ‘Having that early bump up the pension ladder can also free up some money for them to invest in a lifetime or stocks and shares Isa later on to help them build a house deposit or a university fund.’
Some £2,880 can be funnelled into a child’s Self Invested Personal Pension (Sipp) each tax year.
Plus, the Government tops this up by 20 per cent as tax relief, bringing the total to £3,600.
A £100 contribution at Christmas would become £120 with tax relief. If you gave this amount every year, the child would have a £3,587 pot at 18. This would become £25,112 by age 57 if no more was saved in the Sipp from the age of 18. Pension pots can’t be accessed until age 57 from 2028 and this minimum age may rise in future.
POCKET MONEY FUND IS A VALUABLE LESSON
If you would like your loved one to be able to access their money while still a child, a savings account is a good option.
These typically offer significantly lower returns over the long term compared to investments, but are lower risk.
If you put £50 into a savings account with an average interest rate of 4 per cent over 18 years, the child will have a £1,343 pot. With a £100 gift each year, that lump sum rises to £2,687, according to Hargreaves Lansdown.
Anna King, financial planner at NatWest Premier, says giving cash can be a good way of teaching children how money works.
‘Children don’t often have a concept of what a bank is – so tell them why they are getting more money for keeping their savings with the bank,’ she says. There’s typically no tax to pay on children’s savings accounts but there is a little-known tax trap for parents, says Rachael Griffin, of wealth manager Quilter.
If more than £100 interest is earned on money gifted by parents, it counts towards the parents’ personal savings allowance (PSA). Basic-rate taxpayers have a PSA of £1,000, higher rate have £500 and additional rate taxpayers have none.
GIVE THE CHANCE OF A CASH PRIZE
Premium Bonds, the nation’s favourite savings product, are another good option. They are issued by Treasury-backed National Savings and Investments (NS&I), and holders can invest between £25 and £50,000. Instead of a regular interest payment, each £1 Bond is entered into a prize draw every month and winners receive prizes from £25 to £1 million. There’s no guaranteed interest rate so your child’s savings may not grow at all, but the prize fund rate will be 4 per cent from January. Prizes are tax free.
Anyone can buy Bonds for a child under 16. If you’re not the parent or guardian, let them know before you buy them. You can get a gift card when buying for someone else’s child. It can be emailed, but posting it will give them something to open on Christmas day.
COMBAT IHT BILL WITH A GIFT
You can pass on up to £325,000 free of inheritance tax with an additional £175,000 allowance if a main home is left to a direct descendant. Everything over this allowance is taxed at a flat rate of 40 per cent.
But there are opportunities to pass on wealth tax-free – by gifting it at Christmas and throughout the year. For example, if you choose to gift a set amount every Christmas, you can use the ‘gifts out of normal expenditure’ rule. To qualify the gift must be made from income, must not affect your normal standard of living and must be regular.
James Glynn, of Jarrovian Wealth, says keeping good records is key to claiming this exemption. A letter stating your intentions, gifts are made from surplus income and did not impact your standard of living is a good starting point.
You could use your £3,000 annual IHT-free allowance. If you didn’t use last year’s amount, you can carry it forward for one year.
This means that you and your partner could gift up to £12,000 without risking an IHT bill.
You can make as many gifts of £250 per person as you would like each tax year which are exempt from death taxes – but this allowance can’t be used in addition to another allowance, such as the £3,000 annual exemption.
Remember a gift of any amount is free from death duties if the donor lives for at least seven years.