Investment gifts for your children this Christmas
With today's kids likely to need thousands of pounds to get them through university and on to the property ladder, a Christmas gift that will help with some of these expenses is well worth considering.
Although a Junior Isa (Jisa) or a pension plan might not have the appeal of a 'Frozen' Skate and Sing Elsa or a PlayStation, Adrian Lowcock, head of investing at Axa Wealth, points out that it will be worth more and last a lot longer.
'It's not the most exciting gift and you won't necessarily be their favourite relative on the day but, thanks to the power of long-term investments, they'll really appreciate it when they're older and they need the money,' he says.
A look at some of the potential returns indicates just how valuable a financial gift could be in the future. For example, £1,000 tucked away into a Junior cash Isa for a newborn would be worth more than £1,700 by the time they reach 18, assuming an interest rate of 3 per cent.
Go for the stocks and shares version and, with 5 per cent annual growth (net of fees), it could be worth around £2,400, or, with 8 per cent annual growth, as much as £4,000.
Plump for a child pension and the combination of the tax relief available and the length of the time that the money is locked away means the figures could be even more alluring.
As a result, your £1,000 investment, which would be topped up to £1,250 by the government, could be worth as much as £29,800 by the time they reach 65, assuming an annual growth rate of 5 per cent net of fees.
SAVINGS OR INVESTMENTS?
Although the figures may have already helped you to decide whether to opt for a cash savings account or an investment vehicle, there are arguments for and against both.
Working in favour of cash savings products such as deposit accounts, Junior cash Isas or NS&I Children's Bonds is the fact that the child's money is not at risk, while interest helps it to keep up with inflation.
Lowcock says these accounts can also be great for teaching kids about money. 'Kids can add to their savings and see the value grow as interest is earned,' he explains. 'This can encourage them to save for the future.'
But, while cash gives this certainty, Richard Plaskett, client director in the investment trust team at JPMorgan, says that if you're looking to put money away for at least five years it usually makes more sense to invest in equities. 'Growth from equities can be volatile but, over time, you can expect returns that are better than those on cash,' he says.
To illustrate this, he points to the Barclays Equity Gilt Study 2015. This shows that over 10 years, equities have delivered a return, after taking inflation into account, of 4.1 per cent a year compared with cash, which saw its value fall by 0.7 per cent a year based on the average money market rate minus inflation.
Over 20 years, equities notched up an annual return of 4.6 per cent, against cash's 1.1 per cent.
In addition, the study shows that the longer your investment horizon, the greater the probability of stocks and shares beating cash. Over five years, shares outperform 75 per cent of the time, but extend your investment period to 10 years and they will deliver the goods 91 per cent of the time; by 18 years, the probability is up to 99 per cent.
Whether you are considering a savings or an investment product, the tax benefits of Jisas mean they shouldn't be overlooked.
Patrick Connolly, certified financial planner at Chase de Vere, explains their merits: 'These combine tax efficiency, simplicity, a wide choice of investment options and an annual contribution limit of £4,080 for this tax year,' he explains. 'They should be the default options for kids' savings.'
Just like adults investing in Isas, a child can have a stocks and shares Jisa, a cash Jisa or both, and there is no further tax to worry about on the income or interest they generate, nor on any capital gains. You'll need to be a parent or guardian to open one, but anyone can save into them on behalf of a child.
There's also plenty of choice. As well as cash Jisas - which are essentially tax-free savings accounts - with a stocks and shares Jisa you could invest in anything from funds and investment trusts through to exchange traded funds and even individual shares.
Deciding where to invest can be tricky. While Connolly says that many people don't want to take too much risk with their child's investment and therefore recommends a well-diversified fund, Plaskett suggests a more adventurous approach.
'As long as it's a long-term investment, and you're comfortable with the additional risk, why not go for something a bit more risky - for example, an emerging market such as China or India?' he says. 'It's risky, but over time you have the potential for higher returns.'
Although their tax-free status makes them an attractive option, the potential drawback with Jisas is that, once he or she reaches 18, the money is the child's. 'You might have intended the money to be used for university fees or a mortgage deposit, but it could potentially be squandered on foreign holidays and fast cars,' warns Connolly.
CHILDREN'S INVESTMENT PLANS
If a child's Jisa allowance has already been maxed out, you might want to consider a children's investment plan for them. There are plenty of these available that are branded specifically for kids, for example Aberdeen's Investment Plan for Children, Baillie Gifford's Children's Savings Plan, Invesco Perpetual's Children's Fund or Witan's Jump Savings Plan.
Although there's nothing to stop you taking out any investment for a child and either putting it in a bare trust in their name or simply designating it as theirs (in which case the investments remain in your name, but you will be liable for any tax arising on them), the beauty of these child-branded plans is that they are designed to suit the specific needs of people looking to save for children.
For example, on Witan's Jump Savings Plan you can invest lump sums of £250 or £50 a month or quarter, while the Invesco Perpetual Children's Fund will take lump sums of as little as £50, monthly investments from £20 and top ups of £25 plus.
When picking a suitable investment plan for a child, you might also want to weigh up whether to invest in an open-ended fund or an investment trust. Although it will often come down to personal preference and the options available, Plaskett says the closed-ended structure of investment trusts can give them the edge.
'Investment trust managers don't need to worry about holding cash to pay investors looking to sell their holdings. This means that, as well as being fully invested, they can select less liquid assets that might generate higher returns,' he explains.
Another key difference between the two types of vehicle is that investment trusts can borrow, giving investors the benefits of gearing (borrowing). 'If markets are rising, you want more money exposed to this growth,' says Plaskett, adding that gearing can also work against you if the value of the trust's investments falls.
But, with the child also able to access their Jisas and investments held in bare trusts as soon as they reach age 18, some parents and grandparents are taking an even longer view on their investment strategies.
'A pension is a great way to give a child a financial boost in later life,' says Damien Paterson, managing director of Paterson Financial Planning. 'As they won't be able to access it until they are in their late fifties, they can really benefit from compound interest, where the value of their money increases due to growth on the growth.'
Pension savings also benefit from tax relief at 20 per cent, with this contribution from the government allowing you to put away even more for their future. As they're unlikely to have any earnings, the maximum total contribution you'll be able to make each year is £3,600, which works out at £2,880 before the tax relief.
Such timescales also lend themselves to a more adventurous approach with the investments. 'You can take tons of risk with a child's pension,' says Paterson. 'I'd still recommend a blend of different assets but, as you don't have any worries about short-term volatility, you could look at sectors such as technology and emerging markets.'
While the prospect of waiting until they're as old, or even older, than you to get their hands on their money might not fill them with joy initially, Paterson says that having a pension pot can give them opportunities they might not have had otherwise.
'I see a lot of people in their 40s and 50s who want to use their pension to buy their business premises and it can be a bit of a scramble to get enough money together to facilitate this,' he explains. 'Having this fund already growing nicely could open doors for them when it comes to running a business in their 20s or 30s.'