A pension fund or tax-free savings account may not be at the top of your children’s or grandchildren’s wish list for Father Christmas. But donating money for toys this December could mean thousands of pounds – even if you have to wait years or decades for it to be worth it.
If you’re giving it to the grandkids, you might find that their parents appreciate it too. Seven out of ten parents would consider putting money and savings on their child’s wish list with family members, new research from Scottish Friends shows.
So instead of blowing it on a game or toy that the child will forget, put that money into savings for the perfect gift – a great nest egg when they reach adulthood or retire.
BUILD THOUSANDS OF EGGS WITHIN YEARS
If you want to contribute money they will enjoy when they reach adulthood, consider a Junior Isa – also known as a Jisa.
These are tax-advantaged packages of up to £9,000 a year that can be saved and invested for the child. No interest or capital gains tax is due on accumulated assets. You can opt for mutual funds or stocks and shares.
Putting £100 into a bank and Jisa share every Christmas from the birth of a child gives them a £2,989 savings by the time they turn 18. That’s even if you don’t save any one penny, according to figures from the investment foundation. Hargreaves Lansdowne.
Savings: instead of splurging on a game or toy, put that money towards a savings product for the perfect gift.
The stocks and shares in the Jisa are supposed to grow by 5 per cent a year – but remember, markets change so there is an element of risk involved.
Jill Mackay, savings expert at Scottish Friendly, says: ‘Let’s be honest, no child looks at the papers on a Jisa welcome pack as much as they do with new toys. .
‘But you can still have fun. Pack smaller, less expensive physical gifts like pots they can decorate themselves and seeds for flowers and vegetables they can plant.
‘This is a platform to help children understand how savings can grow over time and be thoughtful and thoughtful.’
A child can run an account when they are 16, but they can’t touch money until they are 18. A good lesson in growing wealth.
THINK £1,800 TO £25,000 AND A PENSION
Put their Christmas gift into a pension and the payments will increase.
Although it is difficult for your child to understand now, he will appreciate more than their peers, who are only 22 years old, says Helen Morrissey, head of retirement analysis at Hargreaves Lansdown. ‘As they move up the pension ladder early they can also give themselves money to invest in life or stocks, and share Isa later to help them build up their savings house or university fund.’
A further £2,880 can be put into a child’s Personal Income Pension (Sipp) each tax year.
In addition, the Government will top this up by 20 per cent in tax, bringing the total to £3,600.
A £100 donation at Christmas will be up to £120 plus tax. If you give this amount every year, the child will have a savings of £3,587 at 18. This will rise to £25,112 at age 57 if they don’t save in a Sipp from the age of 18. 57 from 2028 and this low number may increase in the future.
FINANCE IS A PARTICULAR LESSON
If you want your loved one to have access to their money while you’re still young, a savings account is a good option.
The long-term rewards are lower compared to investments, but the risk is lower.
If you put £50 into a savings account with an average rate of 4 per cent for 18 years, the child will get a pot of £1,343. By donating £100 a year, that amount can rise to £2,687, according to Hargreaves Lansdown.
Anna King, financial advisor at NatWest Premier, says giving money is a great way to teach children about money.
‘Kids have no idea what a bank is – so tell them why they get more money for keeping their savings in the bank,’ he says. Children’s savings accounts are generally tax-free but there are little-known tax pitfalls for parents, says Rachael Griffin, of wealth manager Quilter.
If the interest earned on money contributed by parents exceeds £100, it goes into the parents’ personal savings account (PSA). Basic rate payers have a PSA of £1,000, a higher rate of £500 and no stamp duty.
GIVE PART OF THE PAYMENT BUS
Bonds, the nation’s best savings product, is another great option. It is offered by the National Insurance Institute (NS&I) and is supported by the Treasury, and investors can invest between £25 and £50,000. Instead of paying regular interest, every £1 Bond goes into monthly repayments, giving winners from £25 to £1 million. There is no guaranteed interest rate so your child’s savings will never grow, but the bank rate will be 4 per cent from January. Goods are tax free.
Anyone can buy Coins for a child under 16. If you are not a parent or guardian, let us know before you buy. You can get a gift card when shopping for someone else’s child. Emails can be sent, but reading them will give you something to open on Christmas Day.
COMBAT IHT BILL AND GIFT
You can pass on up to £325,000 free of inheritance tax and an additional £175,000 if you leave a main home to a legitimate heir. Everything above this allowance is taxed at a rate of 40 percent.
But there are opportunities to give tax-free – by donating at Christmas and throughout the year. For example, if you choose to donate a set amount every Christmas, you can use the ‘donate from normal expenses’ rule. To qualify for a gift, it must come from income, not affect your standard of living, and be consistent.
According to James Glynn, of Jarrovian Wealth, keeping good records is the key to claiming this position. A letter outlining your wishes and making donations from extra income that doesn’t affect your standard of living is a good start.
You can use your £3,000 tax-free annual allowance. If you didn’t use the money last year, you can carry it forward for one year.
This means you and your partner can contribute up to £12,000 without an IHT bill.
You can make a gift of £250 per person as much as you want each tax year excluding death tax – but this allowance cannot be used in addition to another allowance, such as £3,000 annual exemption.
Remember that a gift of any value is free of death benefit if the donor lives for at least seven years.
Some links in this article are affiliate links. If you click on them we may receive a small commission. That helps us fund This Is Money and keep it free to use. We do not write articles to promote products. We do not allow any commercial relationship to affect our privacy.
