No one can deny the joy children experience when they open a gift on Christmas Day. But money is always a welcome present too, and in these financially uncertain times, investing in a child’s future may seem more valuable than buying them the season’s hottest toy. In fact, more than three quarters of parents are planning on handing over cash at Christmas this year an average £109.93 according to a new survey by Halifax.
If sliding cash into a Christmas card or doing a bank transfer feels too impersonal, there are lots of creative ways to give money, from prepaid cards to Junior ISAs.
Feeling generous?
It’s important to bear in mind that gifting cash to children comes with tax consequences if it involves larger sums. Rob Morgan, chief investment analyst at Charles Stanley, says: “Parents gifting money to a child should be aware that the child can only earn £100 of interest before tax becomes payable by the adult. In contrast, there is no limit to the amount of interest children can earn from cash given by other family members or friends. By saving for your child into a cash junior ISA, you sidestep the potential problem, as interest is tax free,” he says.
Set up a Junior ISA (JISA)
Gifting your child their own ISA may not have them jumping for joy on Christmas morning, but they’ll thank you for it in the long run. A Junior ISA (JISA) works in the same way as an adult ISA, except you can only pay up to £9,000 into it a year (2023/24).
There are two main types:
- cash JISAs, which earn a set interest rate
- investment JISAs that put money to work on the stock market
You are allowed to set up one of each type for your child, but the £9,000 limit applies across both. Your child will be not be able to withdraw money until they turn 18. Use a site such as MoneySupermarket or Unbiased to compare options junior ISAs.
A JISA’s secret weapon is compound interest – essentially, interest paid on interest, says Moneyfarm. So, for example, if a parent saves £50 each month in a stocks & shares JISA, they would have £17,093* for their child at the end of the 18 years. And once the child turns 18, they can take control of the money through an adult ISA.
(*assuming 5% annual growth, compounded monthly).
Create a Junior SelfInvested Personal Pension (SIPP)
It may seem strange to think about your child’s retirement before they’ve even started work, but there are many reasons why a Junior SIPP is worth looking at.
“When it comes to investing for your child, a Junior SIPP is a longterm, taxefficient way to give them a financial head start,” said EmmaLou Montgomery of Fidelity International. “The beauty of a SIPP is that it takes the money out of temptation’s way, as these can only be accessed from age 55 (57 from April 2028).
“Junior SIPPs offer tax relief on your contributions — for every £2,880 you deposit, £720 (20%) will be topped up by the government. To give you an idea of how much your money could grow, a monthly payment of £25 has a projected return of £8,118 after 18 years,” she says. The Junior SIPP allowance for the 2023/24 tax year is £3,600.
“A pension contribution could be the ultimate longerlasting financial gift. The recipient won’t have access to it until their 50s as rules currently stand, but it’s a tax efficient way to help secure a financial future for someone later in life,” says Rob Morgan. “The typically long timescale means some of the money can be invested in riskier parts of the stock market in the expectation of higher returns.”
Give the gift of Premium Bonds
Want to give a loved one the chance of winning a £1m jackpot? Buy them NS&I Premium Bonds and they will be entered into a monthly prize draw to win anything between £25 to £1 million pounds, taxfree.
You can buy Premium Bonds on behalf of children under 16, but let the parents or legal guardians know, as they will need to provide evidence of identity and address. The minimum you can buy is £25 and the maximum anyone can hold is £50,000. In September, the premium bond prize rate rose to 4.65%, the odds improved slightly to 21,000 to 1, and the estimated number of prizes increased. Be aware you are giving them the regular possibility of winning prizes but no guarantee of any return on the money.
Give them a prepaid card
Children generally have to be 11 years old before they can open a regular children’s current account. But if you think your child is ready to make card payments earlier than this, there are prepayment cards available for children as young as six which parents can top up with money. Many come with apps the child can use to keep track of their spending and monitor their balance.
A prepaid card allows your child to spend their gift money in any way they like but feels more tangible than a bank transfer. There are a number of prepaid card and apps to consider.
The best known is GoHenry which is £3.99 a month (with a onemonth free trial). Link your bank account to a GoHenry prepaid card through its app and you can load money on to it whenever you want – it’s an easy way to give pocket money, too. It also has inapp gamified money lessons and parental controls.
Similar services include NatWest’s Rooster Money (£1.99 a month, with a onemonth free trial) and Nimbl (£2.49 a month, with a onemonth free trial).
Give them a money book or game
On the basis that learning about money is also a gift that will keep on giving, here are just a few brilliant books and games that we’ve come across that are widely recommended and wellreviewed:
- The Great Pet Sale by Mick Inkpen. Reading age: 35 years. A good introduction to money and the different ways to make up a pound.
- Grandpa’s Fortune Fables: Stories to teach kids about Money by Will Rainey. Reading age: 610 years. It was the 2022 ii Personal Finance of the year award winner. Neil Moggan, formerly of City Academy Norwich says: “My daughter and I loved reading this and I buy it for my friends’ kids for their birthdays. It’s brilliant.”
- Why Money Matters by Deborah Meaden and Hao Hao. Reading age: 69 years. Explains the purpose and importance of money brilliantly.
How will gifting my money affect my Inheritance Tax?
If you’re gifting a larger sum of money this Christmas, there are a few things to bear in mind regarding Inheritance Tax, says Shona Lowe, a financial planning expert at investment company abrdn.
“You can give away up to £3,000 each year without having to worry about Inheritance Tax. You can split this between as many recipients as you like — this is known as your annual exempt amount.”
Shona adds: “If you didn’t use your annual exemption amount to gift money last year, you can roll it over to this year, taking your allowance up to £6,000.”
In addition, you can give away up to £250 to as many people as you like (and not just at Christmas), as long as that person only gets that from you once a year. This is known as the small gift exemption.
“Just be careful that you don’t use the small gift allowance and annual exemption to cover gifts to the same person, as that isn’t allowed,” cautions Shona. “And remember that any cash gifts you make from your regular income rather than your savings are exempt from Inheritance Tax anyway.”
Finally, if you gift an amount that isn’t covered by one of those allowances, this may be subject to Inheritance Tax if you pass away in the next seven years.
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