Would you like to make your children, or grandchildren, rich for Christmas? Wouldn’t that be a great gift?
It used to be that a cash gift at Christmas was a postal order or a few quid in a Christmas card. But over the years, various governments have created more and more ways for family and friends to gift money to the young ones in tax-efficient ways.
Admittedly it doesn’t mean the excitement of tearing off shiny wrapping paper to find a fabulous toy, but you could mix and match by giving them a few small, cheaper items ton open on Christmas Day while explaining to them that their real present is long-term wealth.
If you explain it well enough, they should be both impressed and educated! The way you gift money this Christmas, should depend on the ages of the children and how much money you have to give.
Firstly consider the tax
A popular question about giving money to family is “how much can I give without paying
tax”. The initial answer is “as much as you like”. Your family members don’t have to pay tax on gifts, although they might pay it on the interest or returns they get on that money further down the line, depending on how they invest it.
However, if you pass on a short time after giving the money (i.e. within seven years) that gift might be counted as part of your estate and, therefore, potentially incur some tax for them.
But remember that you are allowed to give away up to £3,000 a year outside of your estate anyway, and if your total estate is worth less than £325,000 then your inheritors won’t need to pay anything. Less than 4 per cent of estates pay inheritance tax (IHT) so it’s more than likely that your family won’t have to think about that when you pass on.
Gifting to babies and little ones
Giving money to the littlest ones is nice and easy because they’re barely going to notice it, so you don’t need to explain anything to them…just to their parents.
A really quick way to give money to a child is to set up a children’s savings account for them and just put the money in there. The rates are pretty good at the moment, up to 50.8 per cent for the Saffron Building Society’s regular saver.
But in the long-term, savings accounts tend not to keep up with inflation as well as stocks and shares or pension products do. Also, after a while they may need to pay tax on the savings. A better long-term solution would be either to set up a Junior ISA for them and invest the money in stocks and shares funds, or, more surprisingly, set up a pension for them.
Yes, you can set up a pension even for a baby! Admittedly, you may not be around to see them enjoy the end product of your generous gift but it’s a fantastic way of creating wealth for the little one as they will have decades for that money to grow, so even if you can only put a small amount in, by the time they retire it will be worth a lot.
Parents, guardians, friends are allowed to put in up to £2,880 per tax year into a pension for the child although the parent or guardian will need to set it up for them. It’s worth setting up an account for them on one of the investment platforms like AJ Bell, Charles Stanley or Bestinvest and they can help you create a SiPP (Self-invested Personal Pension) for the child.
Because pension contributions get income tax paid back with them and because they have a long time for the money to grow, your baby could be a pension millionaire by the time they start to think about retiring, even if they personally never put any money in!
If you managed to invest £2,880 every year to age 18 in a child SIPP, (with the government adding in tax relief of £12,960), that would mean total contributions of £64,800 over 18 years. If those contributions grew by an annual rate of 5%, then at 18 the pension would be worth an £107,619.
Even if the child never put any more in after this age, the pension would tip over £1 million by the age of 62, just in time for retirement!
Children and teens
You can set up a pension for children of any age and help over-18s to set one up for
themselves. But you could also set up a Junior ISA (JISA) for them. Junior ISAs have the advantage that the child can take the money when they’re 18, which means they could use it for university or buying a car or putting down a deposit on a property. You can put up to £9,000 in JISAs each tax year.
Again, it’s worth considering putting the money in stocks and shares within the JISA while they are young and then, maybe, moving the money to cash holdings a couple of years or so before they take the money out.
The teens don’t have to take the money out when they’re 18. They can just turn the JISA into an adult ISA and keep investing to grow the money even more. Adult ISAs can have up to £20,000 deposited in them each tax year so they can grow it even more.
In fact, according to Alice Haine from the investing platform Bestinvest: “If a family invested £9,000 a year in a Junior ISA for 18-years, based on a 5% annual compound growth rate the child would accumulate a pot of £269,048. If that money was rolled into an adult ISA at 18 and no more contributions were made, by the age of 44 the balance would have topped £1 million.”
Young adults
Kids never stop needing money and the older they get the more they need! If you’re giving to someone who is between 18-39 and a UK citizen you can help them open a Lifetime ISA (LISA) and give them money to put in that. LISAs are marvellous products. You can put up to £4,000 per tax year into them and the government adds in a whopping 25 per cent.
So if your child manages to put the full £4,000 in they will get a guaranteed £1,000 added in – and that’s before the fund they have put the money into grows. Again, for long-term investing it’s best to put this money into stocks and shares rather than cash holdings (savings).
For example, according to the Association of Investment Companies (AIC), if you had invested just a one-off £1,000 in the average investment company for a child 18 years ago, it would now be worth £4,803.
If you had made monthly contributions instead, say £50 a month, the total investment of £10,800 over 18 years would now be worth an impressive £27,530. That could help towards buying a car, a deposit on a first home, or a considerable chunk of further education costs.
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