As the Christmas period is almost upon us, you may have started thinking about your Christmas gift list.
While buying and wrapping presents to put under the tree for the children in your life may bring you joy, you may not relish the idea of having to choose what to buy for them – especially if they already have a fully stocked playroom.
If the idea of buying more “stuff” for your children has lost its lustre, you could consider gifting money instead. While popping some money or a gift voucher inside a card is an easy solution, making an investment on their behalf could make a big difference to their financial futures.
Give your children and grandchildren a healthy financial start to adulthood
In fact, investing for children is one of the best presents you can give to the young people in your life. Crucially, because time is key to growing wealth through compounding, the earlier you start investing for children the better.
Giving your children or grandchildren a healthy financial start to adulthood could help them:
- Fund further education
- Travel the world
- Buy their first car
- Take a firm step onto the property ladder.
Apart from the invaluable financial freedom they might enjoy, investing for children is also a fantastic way to help them learn important money lessons. As they get older, you can involve them in conversations and decisions about how and where their money is invested.
So, here are three possible ways you could invest for the children in your life this Christmas.
1. Invest into a child’s ISA
A Junior ISA (JISA) needs to be opened by a parent or guardian, but once that’s done anyone can pay into it. And you can invest up to £9,000 a year (2023/24).
By investing in a Stocks and Shares JISA when your child or grandchild is young, the money you put away for them may enjoy greater long-term potential for growth.
In fact, according to data from Fidelity International, if you invest just £30 a month into a JISA, by the time your child turns 18, you could have accrued £9,742. Invest £178 a month and you could amass more than £57,000.
Once they reach 18, they can withdraw the money – free of Income Tax or Capital Gains Tax. Alternatively, they can opt to transfer the account to an adult ISA, allowing them to keep the funds invested. They can then continue to make further payments into it on a regular or ad hoc basis.
2. Start contributing to a pension
Saving into a pension may seem an odd idea, especially if your child or grandchild is still very small. Yet, commencing pension contributions when they are young can be one of the best ways to set your child up for the future.
Although they won’t be able to access the money in their pension until they reach retirement, the tax relief on offer, alongside the potential for investment returns over a long period, makes pensions an effective vehicle for providing your children with a future income.
One of the main advantages of a child’s pension is that there is huge potential for the fund to enjoy compound growth. If your child is still a tot, the money could be accumulating for 50 years or more, which allows excellent scope for long-term growth.
Initially, the pension must be set up by the child’s parent or guardian. Once in place, you can pay money in and receive tax relief on payments.
The government automatically tops up contributions by 20% – even for a child – so an annual payment of £2,880 automatically becomes £3,600.
As with all pensions, children’s pensions have an Annual Allowance. In 2023/24, this limit is the lower of either £3,600 gross or 100% of the child’s earnings, if they have any.
You can contribute more than this, but you won’t enjoy the same tax relief on contributions above the Annual Allowance.
Read more: How you could help your child become a pension millionaire
According to calculations from Times Money Mentor, if you invested £300 a month (including the tax relief from the government), you’d be contributing the maximum £3,600 each tax year, from birth until the age of 18, you would have invested a total of £64,800.
Assuming you take away 0.75% for charges and add an average investment return of 4.5% a year, for example, your child’s pension fund could be worth £91,800.
Of course, they can’t access it until retirement so if that £91,800 remained invested for a further 42 years, applying the same charges and investment returns in the example above, the pension pot would be worth around £425,000.
These calculations assume that contributions cease at age 18, but once your child reaches age 18, or starts working, they can, of course, continue to contribute to the same pension fund.
3. Give them a chance to win cash prizes with Premium Bonds
If you fancy giving a financial gift with a difference, you could give your children or grandchildren Premium Bonds this Christmas.
Premium Bonds provide the potential to win tax-free prizes, giving them the opportunity to win anywhere between £25 to £1 million every month.
Once purchased, if the Premium Bond wins, your child can opt to claim the cash prize or use the winnings to purchase more Premium Bonds – potentially increasing their chances of winning more money.
You can invest anywhere between £25 and £50,000 in Premium Bonds for a child. Initially, a parent or guardian will need to be responsible for the account. When your child turns 16, they become responsible for the bond and can register with NS&I to manage the account.
Get in touch
If you’d like to give the children you know the gift of a lifetime this Christmas and would like to discuss all the available options, please get in touch.
Email hello@bluewealth.co.uk or call us on 0117 332 0230.
Please note
The content of this newsletter is offered only for general informational and educational purposes. It is not offered as, and does not constitute, financial advice.
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.
This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
Blue Wealth Ltd is not responsible for the accuracy of the information contained within linked sites.
Blue Wealth Ltd is an appointed representative of Best Practice IFA Group Ltd, which is authorised and regulated by the Financial Conduct Authority.
