As the festive season approaches, you might be considering giving your child or grandchild a cash gift this Christmas. Even better, though, might be upgrading that one-off gift to one with the potential to keep on giving.
Investing comes with risks attached but the chance for greater rewards too. Over a lengthy term, the beneficiary of your gift has the chance to see impressive investment returns and the effects of compound growth.
This could give them a financial boost once they reach adulthood or a stable financial future in the form of a growing pension pot.
So, if you’re unsure of the best way to give a financial gift to a loved one this Christmas, you’ve come to the right place.
1. A cash gift might provide instant gratification but your money could quickly lose real-terms value
You might opt to give a cash gift if your child has something they particularly want, or if your grandchild is growing up so fast you’re no longer quite sure what to get.
This option has instant gratification and they can quickly enjoy deciding what to spend their money on. If the sum is large, you might intend them to spend some while saving the majority. This is a solid plan in practice.
But not only might you lose control of the money at that point (depending on how the child is related to you and their age) but there could be longer-term issues with cash held in a high street bank account.
Inflation is currently falling, but the Bank of England (BoE) doesn’t expect it to drop back to its own 2% target until the end of 2025. And while the BoE base rate has also been steadily rising since 2021, higher rates are only now being passed on to consumers by high street banks.
With savings rates still likely to be below inflation, the cash that your child or grandchild puts into their cash account will be effectively losing value in real terms.
2. Cash Junior ISAs offer a great chance to build a nest egg for adulthood but inflation could still bite
A Junior ISA (JISA) is available to any child below the age of 18, living in the UK. Once your child reaches 18 the Cash JISA automatically transfers to an adult ISA, at which point, your loved one takes sole control of their account.
The tax efficiencies offered by a Cash JISA mean that they are a great way to save.
The annual contribution limit for JISA accounts your child holds is £9,000 (in the 2023/24 tax year) and there is no tax to pay on interest earned.
Money Marketing recently confirmed that between April and June 2023, savers put more than £9 billion into Cash ISAs, a record since ISAs launched in 1999.
You might find, though, that your Cash JISA suffers the same problem as cash savings. Be sure to shop around to find the best available rate and speak to us to discuss if it’s the right plan for you.
3. A Stocks and Shares JISA could see higher returns… for additional risk
As the name suggests, a Stocks and Shares JISA is invested in the stock market.
While this comes with additional risk, you might have read in our recent blog, ‘Why now isn’t the time to ditch your long-term investments despite rising cash rates’, that the general trend of stock markets is upward. This is especially true over the longer time frames you’ll be considering for your child’s investment.
What’s more, any gains you make in a Stocks and Shares JISA are free of both Income Tax and Capital Gains Tax (CGT).
While the value of your loved one’s investment can go down as well as up, a diversified investment aligned to a long-term time frame could provide better returns than cash savings.
As with a Cash JISA, full control over the account investment passes to the account holder once they reach age 18. If you have definite ideas about how you want your Christmas present to be spent (university fees, for example) you might find that you are better off using another mechanism, such as a trust, to make these stipulations.
4. Trusts allow you to retain some degree of control over who benefits from your gift… and when
A trust is a legal arrangement that you can set up to pass a range of assets to your chosen beneficiary.
You might use a trust to set out clear rules on how and when a child can access the money you have gifted to them. You might even arrange for your child to receive an income from the investment, from a certain age.
A trust gives you much greater control over how the assets are used but there are different types to choose from. That can make picking the right type, and then setting them up in line with your wishes, quite complex.
A bare trust is one of the simplest forms of trust, while a discretionary trust gives you (or your chosen trustees) even greater control.
We can help you to think about your ultimate goal, making it easier to decide on the right sort of trust for you. However, you need to consider there will be trustee responsibilities, HMRC registration and possible tax reporting to consider.
5. You might opt for the longer-term investment offered by a pension but consider how long your money will be locked away for
One way to ensure that your loved one can’t touch your investment until later in life is to put the money into a pension.
Retirement funds can only be accessed from the minimum pension age (currently 55 but rising to 57 in 2028).
Like ISAs, pensions are incredibly tax-efficient and starting one for a young child could make a huge difference to their financial stability in later life.
You can currently contribute up to £2,880 a year (for the 2023/24 tax year), with tax relief added by the government to make a gross contribution of £3,600.
The long-term nature of this investment, likely many decades, means your money has huge potential for investment returns and compound growth. It could also teach a valuable lesson about the benefits of long-term investing.
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The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.
Workplace pensions are regulated by The Pension Regulator.