Here are the best savings and investment presents to help children grow their nest eggs
With Santa bringing the toys and games, it can be hard to know what else to give the children in your life for Christmas. But instead of a gift voucher, consider a present that might kick-start a passion for saving and investing.
Here, Which? rounds-up the best financial gift ideas that can help kids meet life goals, whether that’s buying their first car, paying their way through university, or putting down a deposit on a home.
4 financial gifts for Christmas
Cold hard cash is the default option for people stumped for what to give, but instead of stuffing a £20 note in a Christmas card, think about wrapping it up in one of the following products:
1. Junior Isas
A Junior ISA (Jisa) is a long-term savings or investment account that parents and legal guardians can open for under-18s. They can be a great way to give a child a head start in life – and cash invested in them will earn interest. They can also help your child avoid a bill from HMRC.
Children are liable to pay tax on savings, as they have the same income tax allowance as adults, and there’s also the ‘£100′ rule to prevent parents from using their tax-free allowances as a way of cutting down their own tax bill. We explain the tax children pay on their savings and the ‘£100 rule’ in our children and income tax guide.
A Junior Isa, however, allows you to save up to £9,000 for your child every year, tax-free.
2. Children’s savings account
There are several different types of products for children on the market and which one you choose will depend on your savings goals and circumstances. Here are the main ones available to open for under-18s:
- Instant-access These offer the flexibility to dip into the money when you need it, but because the rate is variable, the interest offered may go up and down at the whim of the provider. They also tend to offer lower rates than other types of savings product, such as fixed-term bonds.
- Regular saver Similar to the adult account, regular savers require you to deposit cash every month and are designed to encourage young people to get into the habit of saving. They usually run for a set period too – for example, 12 months. Rates tend to be more generous than other accounts, but there are usually lots of caveats to watch out for. These include stringent withdrawal limits and penalties for missing payments.
- Fixed bonds These require you to lock your money away for at least a year, usually in exchange for higher rates. There are only a handful of fixed-rate accounts for children on the market, and because some adult fixed-rate accounts are open to customers of any age, you might find better returns if you widen your search.
Savings rates hit record highs in 2023, but interest on some types of accounts is now falling. It’s therefore more important than ever that you shop around for the best deal. Take a look at our guide on the best children’s savings accounts for the latest rates.
3. NS&I premium bonds
Anyone aged 16 or over can buy premium bonds from National Savings & Investments (NS&I) and you can buy them on behalf of a child or grandchild, giving them a chance of winning up to £1m.
The minimum investment is £25, with a maximum holding of £50,000. Children can take charge of managing their premium bonds when they turn 16.
However, if you’re looking for guaranteed growth on the cash being saved, premium bonds aren’t the way to go. Even with average luck, someone investing £1,000 will probably win nothing over a year.
4. Children’s pensions
It’s never too early to start saving for retirement. You can help a young person build their savings by opening a pension fund that they can access when they retire.
Pensions can be opened for a child anytime from birth until they turn 18 and, although only a parent or legal guardian can start one, anyone can contribute once it’s up and running.
Unlike adult self-invested personal pensions (Sipps), which let you pay in up to 100% of your earnings every year and qualify for tax relief on contributions up to a maximum £60,000, the junior Sipp allowance for the 2023-24 tax year is just £3,600.
You have until 5 April 2024 to use the current annual allowance. But you don’t have to pay in this much: most providers let you contribute £25 a month at the lower end.
Do children need to pay inheritance tax on cash gifts?
Most gifts you make to other people during your lifetime (unless they fall into the list of tax-free gifts) are classified as ‘potentially exempt transfers’, or PETs for short.
If you survive for seven years after making the gift, no inheritance tax is due. However, if you die within this time, the gift will be considered part of your estate for inheritance tax purposes.
Generally, PETs are applied to your £325,000 tax-free allowance before the rest of your estate. So, unless you’ve given gifts worth more than this allowance, the recipients are very unlikely to pay inheritance tax.
However, if much of the tax-free allowance has been used up against PETs and taxable lifetime gifts, this can leave little or no allowance to be used against the rest of the estate.
Another way to gift money to your children is through a mortgage deposit, but you should take independent advice before going ahead with this.
Inheritance tax in general is a hugely complicated area so it’s worth speaking to a professional for advice on your specific circumstances.
