Christmas is almost upon us, but there is still time to buy the best last-minute gift you can choose for any child – a savings account or investment plan.
Time to play Santa
As you can arrange these online, you don’t need to rush down to the shops, but can get it sorted in time for Christmas with minimum stress.
I’ll admit this may not be the most exciting gift they’ll unwrap on the 25th, but they will learn to appreciate it over time. One day, they may even thank you, because investing for children is one of the best things you can do for their future.
Many people start with a simple bank and building society savings account. Nothing wrong with that, it’s a great way of teaching them how money works, especially if they have a cashbook or mobile banking app, so that they can watch their balance grow.
Also, with accounts such as HSBC’s MySavings paying a variable 3% on up to £3,000, you can get more than double the best-buy rate on an adult account.
Avoid a shock tax bill
Children can earn up to £100 interest a year on money given by a parent, step-parent or guardian without any income tax liability, although interest above that may be taxable on the adult. Some families will therefore prefer to take out a tax-free Junior Cash ISA instead.
Again, the rates are better than on adult Cash ISAs, with Coventry Building Society leading the pack by paying 3.6%.
However, I’d urge you to go one step further, and take out a Junior Stocks and Shares ISA instead.
Some parents and grandparents think stock markets are too risky for the little ones’ money. But they have got things the wrong way round. Children can afford to take more risks than any other type of investor, because they are younger, and have bags of time to overcome any short-term stock market setback.
How shares can beat cash
If you invest £100 a month in a Junior Cash ISA paying 3% a year, after 18 years, your child will have £28,904. However, if you invest in a Stocks and Shares ISA and their money grows at 7% after charges, close to the long-term historical return on the stock market, they will have £43,655.
You could always move some of the money back into cash as they get closer to drawing it, in case of a last-minute market correction.
A range of investment platforms offer Junior Stocks and Shares ISAs, including AJ Bell, Fidelity, Charles Stanley, Hargreaves Lansdown, Interactive Investor and Vanguard.
You then have to choose investment funds to put inside your tax wrapper. The low-cost Vanguard LifeStrategy range of passive index-tracking funds is popular, as are global investment trusts such as Scottish Mortgage, F&C Investment Trust and Witan. Investment funds Fundsmith Equity, Lindsell Train Global Equity and BMO Global Smaller Companies are also in demand.
Alternatively, you may prefer to build a portfolio of top FTSE 100 stocks instead.
Most of the stuff you give the kids at Christmas will be forgotten in days. This is one gift that could last them a lifetime.
