David Prosser examines potential financial offerings for your children this festive season.
Are you planning to give a child a financial gift this Christmas? If so, think carefully about how you do it – simply handing over cash or making a deposit in a savings account may not be the best option. Instead, look for a gift you can give tax-efficiently and one with real prospects of growing over time. Plus, if you don’t want the money to be frittered away, consider a route where there are some restrictions on withdrawals.
With those criteria in mind, there’s really a shortlist of just two to consider. The most obvious option is a Junior Isa, the kids’ version of the individual savings allowance available to adults. A child’s Junior Isa must be opened by their parents or legal guardians, but anyone can put money in – in the 2019-20 tax year, the maximum total contribution allowed is £4,368.
The alternative is to open a pension on behalf of a child. That might sound like an odd thing to do for someone so young, but this can be a great way to give a financial gift because the government tops up your money. Contributing the maximum £3,600 a year to a child’s pension will cost only £2,880.
Both Junior Isas and pensions offer tax-efficient savings and good long-term growth prospects if you pick the right underlying assets. Plus they come with built-in discipline – a Junior Isa doesn’t give the child access to their money until age 18, while money in a pension can’t be accessed until age 55 (that really is a gift that keeps on giving as it grows over 50 years or more).
It’s what’s inside that counts
There are pros and cons in the Junior Isas versus pensions debate. But don’t lose sight of the fact that both these products are just wrappers – and just like other types of Christmas present, it’s the gift inside that offers the real value. This is the saving or investment you’re giving inside the tax wrapper.
If you’re investing for the long term – perhaps up to 18 years or longer – it makes sense to look at assets that are likely to produce the most growth, even if that means some short-term ups and downs; these don’t matter if there’s no rush to get your money back. In practice, that almost certainly means investing in the stock market, which in the past at least has consistently outperformed other asset classes over longer periods – five to 10 years or more.
Consider the figures. If you give a child £1,000 this Christmas via a Junior Isa or pension and it grows at a rate of 2% a year – just about the best rate you can find today on cash savings – it will be worth £1,428 in 18 years’ time. By contrast, if the money earns 5% a year, an assumption that financial advisers tend to rely on for stock market returns, it will grow to £2,407 over the same period – that’s almost £1,000 more.
How to buy stocks and shares
How, then, in practice to invest in the stock market? Well, an investment company is certainly worth considering. These are investment funds managed by a professional who pools the contributions of thousands of investors and then invests the money in a portfolio of different stocks and shares on their behalf. With a large fund, the manager can spread his or her bets to reduce risk and keep costs down.
Investment companies have several advantages over other types of fund, but one of the biggest is that they’re independent companies with boards of directors who have a legal duty to look out for the interests of shareholders. Their job is to make sure the fund manager is doing his or her job well – to hold them to account on investors’ behalf.
You can access most investment companies through the company providing your Junior Isa or pension – and you’ll have the option of making monthly investments rather than paying a lump sum. This can have real advantages. Not only is it a more affordable way to invest, but also, you benefit from a statistical quirk known as pound-cost averaging that smooths out the ups and downs of the stock market. In months when the market has fallen, your monthly contribution buys more shares in the fund, helping your investment to rebound when the recovery comes.
Think it through. An investment company may not have the immediate lure of a mobile phone, the latest computer game or even a bar of chocolate. But the best stocking fillers are those that haven’t been all but forgotten by New Year’s Day. An investment company will be treasured for years to come.