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A tax-free pension or savings account probably isn’t at the top of your children’s or grandchildren’s wish list for Santa. But donating cash instead of toys this December could be worth thousands of pounds – even if they have to wait years or decades to enjoy it.
If you are giving something to your grandchildren, their parents may thank you too. Seven in ten parents would consider putting money and savings on their children’s wish list for family members, new research from a Scottish mutual friend shows.
So instead of spending money on a game or toy that a child will soon forget, funnel that money into a savings product for the ultimate gift: a generous nest egg for adulthood or even retirement.
BUILD A NUMBER OF SAVINGS WORTH THOUSANDS OVER THE YEARS
If you want to gift money that they can enjoy when they reach adulthood, consider a Junior Isa, also known as a Jisa.
These are tax-efficient wrappers in which up to £9,000 a year can be saved or invested for a child. No interest or capital gains taxes must be paid on the accumulated wealth. You can opt for a cash version or stocks and shares.
Investing £100 in Jisa stocks and shares every Christmas from the birth of a child will net them savings of £2,989 by the time they turn 18. That’s even if you don’t save a single cent more, according to the investment platform’s calculations. Hargreaves Lansdown.
Savings: Instead of spending money on a game or toy, funnel that money into a savings product for the ultimate gift.
This assumes that stocks and shares held in Jisa grow by 5 per cent each year, but remember that markets can fluctuate so there is an element of risk involved.
Jill Mackay, savings specialist at Scottish Friendly, says: “Let’s be honest, no child will look at the paperwork for a Jisa welcome pack with the same level of delight as they would at the latest hot toy.”
But you can still make it fun. Wrap a smaller, more economical physical gift, such as a flower pot they can decorate themselves and flower or vegetable seeds they can plant.
“This could be a foundation to help children understand how savings can grow over time with careful thought and analysis.”
The child can take control of the account when he or she is 16, but can’t touch the money until he or she is 18. It’s a good lesson in cultivating wealth.
TURN £1,800 INTO £25,000 WITH A PENSION
Invest your Christmas gift in a pension and the rewards will multiply even more.
While your child may find it difficult to understand now, later they will appreciate the advantage over their peers who are only automatically enrolled at age 22, says Helen Morrissey, head of retirement analytics at Hargreaves Lansdown. “Having that early move up the pension ladder can also free up some money for them to invest throughout their lives or in stocks and shares Isas later to help them build a house deposit or university fund.”
Around £2,880 can be channeled into a child’s Self-Invested Personal Pension (Sipp) each tax year.
In addition, the Government adds a further 20 per cent as tax relief, bringing the total to £3,600.
A contribution of £100 at Christmas would become £120 with tax relief. If you donated this amount each year, the child would have a pot of £3,587 by age 18. This would become £25,112 at age 57 if no more was saved into the Sipp from age 18. Pension pots cannot be accessed until age 57 from 2028 and this minimum age may increase in the future.
THE POCKET MONEY FUND IS A VALUABLE LESSON
If you want your loved one to be able to access their money while they are still a child, a savings account is a good option.
They typically offer significantly lower long-term returns compared to investments, but carry lower risk.
If you put £50 into a savings account with an average interest rate of 4 per cent for 18 years, the child will have a fund of £1,343. With a donation of £100 each year, that lump sum rises to £2,687, according to Hargreaves Lansdown.
Anna King, financial planner at NatWest Premier, says giving cash can be a good way to teach children how money works.
“Kids don’t usually have a clue what a bank is, so tell them why they get more money by keeping their savings in the bank,” she says. There is usually no tax to pay on children’s savings accounts, but there is a little-known tax trap for parents, says Rachael Griffin of wealth manager Quilter.
If more than £100 is earned in interest on money donated by parents, it counts towards the parents’ personal savings allowance (PSA). Basic rate taxpayers have a PSA of £1,000, higher rate taxpayers have £500 and additional rate taxpayers have none.
GIVE THE CHANCE FOR A CASH PRIZE
Premium bonds, the country’s favorite savings product, are another good option. They are issued by National Savings and Investments (NS&I), backed by the Treasury, and holders can invest between £25 and £50,000. Instead of a regular interest payment, each £1 bond is entered into a prize draw each month with winners receiving prizes of £25 to £1 million. There is no guaranteed interest rate, so your child’s savings may not grow at all, but the prize fund rate will be 4 percent starting in January. Prizes are tax free.
Anyone can purchase vouchers for a child under 16 years of age. If you are not the parent or guardian, please inform them before purchasing. You can get a gift card when shopping for someone else’s child. It can be emailed, but posting it will give them something to open on Christmas Day.
COMBAT IHT BILL WITH A GIFT
You can transfer up to £325,000 inheritance tax free with an additional allowance of £175,000 if the main home is left to a direct descendant. Anything above this subsidy is taxed at a flat rate of 40 percent.
But there are opportunities to pass on wealth tax-free: gifting it at Christmas and all year round. For example, if you choose to give a certain amount each Christmas, you can use the “gifts outside of normal spending” rule. To qualify, the donation must be made from income, must not affect your normal standard of living, and must be regular.
James Glynn of Jarrovian Wealth says keeping good records is key to claiming this exemption. A letter stating your intentions, donations are made from excess income and do not affect your standard of living is a good starting point.
You could use your annual IHT-free allowance of £3,000. If you didn’t use last year’s amount, you can carry it forward for one year.
This means you and your partner could donate up to £12,000 without risking an IHT bill.
You can make as many gifts of £250 per person as you wish each tax year, which are exempt from inheritance tax, but this allowance cannot be used in addition to another allowance, such as the £3,000 annual exemption.
Remember that a gift of any amount is free of inheritance duties if the donor lives at least seven years.
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