Giving your children or grandchildren or a financial gift may not be as exciting for them as the latest toys or a games console but they’re likely to prove much more valuable in the long run.
Investing in a financial gift can provide your young relatives with a useful nest egg for their future – and might even encourage them to start the savings habit themselves.
Here, we explore some of the different options you can choose from.
If you’re not comfortable taking any risks with your money, or you want your child or grandchild to have easy access to the money you’re giving them, you may decide to pay into a savings account provided by a bank or building society. If the child is under 16, you can usually open an account on their behalf, but you’ll need to provide their birth certificate to the account provider, and you must have the permission of their parent or legal guardian.
Despite the Bank of England raising the base rate to 1.75% this month (August), savings rates are still low, but children’s monthly savings accounts usually offer the best returns. For example,you can open a Saffron Building Society’s Children’s Regular Saver with as little as £5 and earn 3.02% AER a year. You can pay in a maximum of £100 a month, which means if you paid in the maximum amount each month you would be left with an estimate balance of £1,219.46 at the end of the 12 months
Another competitive children’s savings account includes HSBC’s MySavings account which children over the age of seven can open with a minimum of £10 and earn 3.25% AER on balances up to £3,000. Anything over this will earn 1% AER.
Unless you have an exceptionally large amount of savings, there’s no risk of losing money with a savings account (the first £85,000 you have saved is protected by the Financial Services Compensation Scheme (FSCS) in the event that a bank or building society fails) so assuming you’re under this limit, you’re guaranteed to get back at least the amount you put in.
There is, however, the chance that the interest you earn on your savings may not keep pace with inflation, or the rising cost of living. That means the purchasing power of your money could reduce over time.
Premium Bonds from National Savings & Investments (NS&I) don’t pay any interest, but instead bonds are entered into a monthly prize draw to win a range of financial prizes. These start from £25 and go up to £1m and are all tax-free.
You can invest between £25 up to £50,000 on behalf of a grandchild or child up to the age of 16. Withdrawals are allowed at any time without penalty. The current prize rate for Premium Bonds is equivalent to an interest rate of 1%, and each bond will have a one in 34,500 chance of winning a prize. However, some people won’t win anything at all and others will win more than this, so this figure shouldn’t be relied on as a guide to the actual returns you’ll end up with – your grandchild might get a lot less.
If you want to give a financial gift to a young child, then long-term investments may provide the potential for higher returns over a longer time period than you’d get if you put money into a savings account. Remember though that investments can fall as well as rise, which means there’s a risk of getting back less than you invest.
Investing through a fund or several different funds, which will spread your money across a wide range of shares, is usually one of the easiest ways to tap into the long-term potential of the stock market. If you’re not sure which funds are right for you, it’s important to seek professional financial advice. You can find a local financial advisor on VouchedFor or Unbiased, or for more information, read our guide on How to find the right financial advisor for you. VouchedFor also offer a Free Financial Health Check with a trusted, well-rated advisor in your local area so you can see if you think advice might be for you. You can learn more about investing in our article Investing – the basics.
It’s worth noting that as children can’t directly own shares or funds before they reach the age of 18, you will have to invest through a specific type of product – for example a Junior ISA, a pension or by setting up a trust.
Parents and grandparents looking to give investments to their children often use what’s known as a ‘bare trust’. Under this type of trust, parents or grandparents are trustees and decide how the child’s money is invested. The child is the owner and can take ownership of all the capital and income of the trust at age 18 or over if they’re in England and Wales, or at the age of 16 if they live in Scotland. Until that time, the trustees are responsible for looking after the assets.
Any assets held within a bare trust on behalf of a child are taxed as if they belong to the child which usually means there’s no income tax and capital gains tax (CGT) for them to pay. A child has the same personal income tax allowance and CGT allowances as an adult. For the 2021-22 tax year, the personal income tax allowance is £12,750 and the CGT allowance is £12,300.
However, if a parent sets up the trust and the income from it exceeds £100 per tax year then the income will be treated as the parent’s income for tax purposes. Usually setting up a bare trust is very straightforward – often, for example, if you are setting up an investment account on behalf of a child, the account provider will offer an ‘election for bare trust’ form you can download and complete.
You can find out more about bare trusts and how other types of trust work here.
If you want to save or invest over a period of several years, another option is the Junior ISA (JISA). This is similar to the adult ISA and allows you to save money for your child without them paying income tax or capital gains tax on the interest or returns they receive.
The annual allowance for JISAs for the 2021-22 tax year is £9,000, which you can pay into a junior cash ISA or a junior investment ISA, or you can split the allowance between the two.
Money held in a Junior ISA can’t be accessed until the child reaches the age of 18, at which point they can add to or withdraw from it as they would with any other ISA. They can start managing the account on their own from the age of 16.
According to savings website Savingschampion.co.uk, Monmouthshire Building Society pays 2.65% on its Cash Junior ISA which can be opened with a minimum balance of £10.
Several investment companies offer ready-made investment Junior ISAs, including Fidelity, Moneybox, Vanguard and Nutmeg, or you can go for a DIY approach and choose the investments you want to hold on behalf of your child or grandchild yourself. Providers of self-invested Junior ISAs include Hargreaves Lansdown, AJ Bell and Fidelity. There are also apps available which can help you build a nest egg for your children too. For example, Beanstalk has a Junior ISA with no minimum contribution limit. Friends and family can link to your account from their own app to top up your children’s savings pots and send you messages to let you know what the money’s for, for example, a Christmas or birthday present, meaning no more trips to the bank or queueing to deposit cheques.
Rather than offering a confusing range of investment options, there is a simple sliding ratio that lets you choose whether to invest more in cash funds or share funds. With the right ratio, if you start depositing £5 per month when your child or grandchild is born, by the time they are 18, they could have as much as £8,000 in savings, although it’s important to remember that the value of investments can fall as well as rise.
If you’re looking to give a really long-term financial gift, another option you might want to consider is a pension.
It might seem odd thinking about paying into a pension for a child (especially if they’re still in nappies) but there are big tax benefits in putting away money for their retirement.
You can pay in up to £2,880 per year for a child, and tax relief boosts that sum to £3,600 gross. No withdrawals can be made until age 55, rising to 57 by 2028 and 58 by 2044.
No tax is payable on income from investments held in a pension or on any capital growth, provided they’re within pension allowances. Tax is only paid when money is taken out of a pension and is currently charged at your marginal rate of income tax.
Find out more about how pension allowances work in our article Understanding your pension allowances.
Financial gifts and Inheritance Tax
It’s important to remember that gifts to your young relatives, can in some circumstances, still count towards the value of your estate for Inheritance Tax purposes. This is mostly only a concern if you think your estate will be liable to pay Inheritance tax (IHT), which is payable at a rate of 40% on the value of your estate above £325,000 when you die, or £650,000 if you’re married. Even if you think your estate may be liable for IHT, you can still give away £3,000 each tax year free of IHT. If you don’t use your full £3,000 in a tax year, you can carry over any unused allowance to the following tax year, up to a maximum of £6,000 in any one tax year.
You can also make small gifts of up to £250 a year to as many people as you like, but you can’t give any one person more than £250 in a tax year. This means you can’t give someone two gifts of £250 or combine the £250 with another allowance. For example, giving someone your £3,000 annual allowance plus a smaller gift of £250 wouldn’t be permitted. In addition to these exemptions, you can make regular gifts out of your surplus income (the income you have left over after all your outgoings have been paid) free of Inheritance Tax, as long as you can prove that making these gifts didn’t affect your standard of living. These gifts must form part of your ‘normal expenditure’ and be regularly paid out.
You can find out more about which gifts are exempt in our article Which gifts are exempt from Inheritance Tax? For more information on Inheritance tax, you can read our guide Understanding Inheritance Tax.
Have you given a financial gift to a child or grandchild, or is it something you’re considering doing? If so, we’d be interested in hearing from you. You can join the money conversation on the community or leave a comment below.