Children's gifts with a future
Buying presents for children can be a thankless task. You can spend hours traipsing up and down the high street in search of the perfect gift, only to find they bore of it within days.
So it’s no surprise that, according to research from Moneyexpert.com, many parents and relations choose instead to hand out a whopping £2.4 billion in cash gifts on present-giving occassions such as Christmas, with each child receiving an average of £95.
Yet, for many relatives, giving children money they can then go and spend on toys themselves isn’t particularly appealing. But if you pay the cash into a savings account or investment plan in the child’s name, you can still give them a gift that could really make a difference to their lives.
There are numerous options on offer, so before you do anything, it’s worth asking the child’s parents what they would prefer you to do – it may be that you can contribute to an account they have already set up. For example, every child born after 1 September 2002 will have a child trust fund (CTF). Parents can opt for a cash savings CTF or one that invests in equities.
The government kick-starts the fund with at least £250 when the child is born, and follows this with a top-up of at least £250 when they reach the age of seven. Friends and family are free to deposit up to £1,200 into the CTF each tax year, and every penny earned in interest is tax-free.
CTF provider the Children’s Mutual calculates that if you were to deposit £20 every Christmas for 18 years – assuming a growth rate of 7% – this would be worth £1,700 by the time the child becomes an adult. Raise that to £50 each Christmas and they’ll have £2,630 by the time they turn 18. So even the smallest cash gift represents a far better investment than a toy or gadget.
“We see a definite spike of activity around Christmas, with many grandparents choosing to top up their grandchildren’s funds,” says Tony Anderson, director of marketing at the Children’s Mutual. “And it’s easy to do, either over the phone or online – all you need is the child’s fund number and their bank details.”
Of course, Christmas isn't the only time of the year when you have to buy gifts for the children in your family, and birthdays as well as Easter could be the perfect time to give a gift with a difference.
However, not only may the child in question be too old for a CTF, you may decide that this isn’t the right home for your gift. You may want the child to be able to dip into the account before they turn 18. Or, alternatively, you may want to ringfence the money for big expenses like university fees and ensure it doesn’t get frittered away on teenage excesses.
If you want the child to be able to access their money, a savings account is a good option. Paying money in and watching it grow is a great way of instilling a savings habit and teaching children the value of money. You can open an account in a child’s name at any age, but you’ll have to manage their money until they are seven.
However, although a savings account is a safe haven for all Christmas and birthday cheques, if you regard your gift as a long-term investment you may be disappointed by the slow rate of growth they offer.
“Barclays Capital’s recent Equity Gilt survey found that over any consecutive 18-year period there’s a 99% chance that equities will outperform cash,” explains Sherry-Ann Sweeting, a marketing manager at the Scottish Investment Trust. “Cash might not keep up with the effects of inflation either, so if you have more of an appetite for risk, it makes much more sense to invest on their behalf.”
Whatever your relation to the child there are a number of investments you can make in their name. If you want to invest money in the stockmarket, the most sensible option is a collective fund, such as an open-ended investment company (OEIC), a unit trust or an investment trust. With unit trusts and OEICs, savers’ money is pooled together and actively managed across a wide range of stocks and shares, helping spread the risk.
As there is no limit to the amount of units that can be issued, the more people that buy into the fund, the more units are created.
Investment trusts, on the other hand, are similar to unit trusts in that investors’ money is pooled and then invested on their behalf, but they’re structured as a share and quoted on the stock exchange. Only a limited number of shares are available, so the price of shares isn’t just dictated by the value of the investment, it will also be influenced by investor demand. And, unlike unit trusts, managers can borrow to invest (‘gearing’).
The benefit of this is that it can magnify the gains for investors; the downside is that losses can be enlarged too.
Working out what type of investment is right for both you and the child will depend on a variety of factors including the choice of funds, your attitude to risk, and the amount you’re prepared to pay.
Ben Yearsley, an investment manager at Hargreaves Lansdown, points out that investment trusts can be a more stable option over the longer term. “Managers of unit trusts tend to come and go, whereas managers of
investment trusts tend to stick it out over the long term. From an investment point of view, this can be beneficial,” he says.
Investment trusts are also usually the cheaper option. Initial charges on OEICs and units trusts can be as much as 5%, while annual management charges can reach 1.5% or more. Investment trusts have no initial charges and annual management fees of around 1%, but they do attract a share dealing fee of around £15 and stamp duty of 0.5%.
However, if you are risk-averse, Gavin Haynes, an independent financial adviser at Whitechurch Securities, suggests choosing a unit trust. “Because of the way investment trusts are structured, they are priced according to market forces and the demand for their shares, unlike unit trusts whose price reflects the value of their underlying assets. So when times are good investment trusts do well, but when markets turn they become more volatile as they fall out of favour.”
You will also need to check how much you can afford to pay in. “If you’re looking for a low-cost unit trust as a Christmas or birthday present, some will accept minimum monthly contributions from as little as £20 or annual contributions of £50 – Invesco Children’s Fund is a good example,” says Haynes. “But the overwhelming majority of unit trusts are set at a minimum of £50 a month.”
You don’t have to invest in a dedicated children’s plan, but the appeal of these is that they usually have lower minimum investment levels. With the exception of the Invesco plan, these schemes are most typically found in the investment trust world.
James Budden, marketing director at Witan, claims its Jump plan is particularly popular around Christmas. “Our 20,000 Jump savings plan customers are split between parents, who put in their child benefit on a regular basis, and grandparents who want to invest much larger lump sums, particularly around this time of the year,” he says.
Budden adds that both sorts of customer understand the benefits of investing in stocks and shares. “Over a 10-18 year period, the performance of our product compared with cash is clear.”
According to the Association of Investment Companies, if you invested cash with Jump over a 10-year period to 1 September 2008, you would have gained a return of 62.8%, compared with just 18.1% if you had left it sitting in a typical savings account.
If an investment plan doesn’t appeal or you don’t want to commit to making regular contributions, you could always consider wrapping up some share certificates. This can be a great way of teaching older children about how the stockmarket works – especially if you choose the stock wisely and pick a company whose fortunes the child will enjoy following.
Ian Benning, product development manager at The Share Centre, says that buying shares is quick and easy. “The Share Centre’s Junior Investment Account is a great alternative to the CTF,” he adds. “It can be opened in the name of the child and can operate as either a bare trust or designated account. You will then be free to buy as many shares as you like online or over the phone, either by a regular monthly direct debit or a lump sum.”
A minimum share-dealing fee of £2.50 applies on all purchases, as well as stamp duty of 0.5%. However, share certificates cost £15 each.
Shares, by their very nature, are a higher risk investment than funds. “Should something go wrong and the share price plunged you could stand to lose everything,” warns Ben Yearsley. But if you’re only investing a token sum, and your priority is getting the child excited about investing, it’s not too much of a gamble.
Whichever type of investment you choose, remember that children cannot actually own it until they turn 18. As you’ll have to manage the investment on their behalf until then, it’s worth thinking about the best way of holding the money. The most straightforward option is to designate the account to the child. This means you keep control of the money and can decide when they will receive it. However, you will be liable for tax on the growth.
Alternatively, you can opt for a simple bare trust, where the money will be treated as the child’s for tax purposes and will fall outside of your estate from an inheritance tax point of view. However, the money will legally come into the child’s hands at 18 and will then be theirs to spend as they wish. Other trusts, such as discretionary trusts, offer savers more control, but are also more expensive.
You can find out more about trusts and tax in relation to children’s savings in our latest guide, which you can download for free here.
Of course, it’s highly unlikely that any of these sensible gifts will feature highly on many children’s wish-lists this year, but the chances are that come Christmas or their birthday they’ll be drowning in so many new toys that one less will barely register.
And, you never know, they may even thank you for your prudence a few years down the line.
All investment returns are measured against a benchmark to represent “the market” and an investment that performs better than the benchmark is said to have outperformed the market. An active managed fund will seek to outperform a relevant index through superior selection of investments (unlike a tracker fund which can never outperform the market). Outperform is also an investment analyst’s recommendation, meaning that a specific share is expected to perform better than its peers in the market.
A hugely unpopular tax paid on property and share purchases. Stamp duty on property is levied at 1% for purchases over £125,000 (£250,000 for first-time buyers) which then moves up at a tiered rate. For property between £125k and £250k you pay 1%, then 3% from £250k up to £500k and then 4% from £500k to £1m and then 5% for properties over £1m. But unlike income tax, which is “tiered” and different rates kick in at different levels, stamp duty is a “slab” tax where you pay the rate on the whole purchase price of the property. On shares, stamp duty is charged at a flat rate of 0.5% on all share purchases. Figures correct as of May 2011.
A collective investment vehicle (known in the US as a “mutual” or “pooled” fund) and similar to an Oeic and investment trust in that it manages financial securities on behalf of small investors who, by investing, pool their resources giving combined benefits of diversification and economies of scale. Investors buy “units” in the fund that have a proportional exposure to all the assets in the fund, and are bought and sold from the fund manager. The price of units is determined by the value of the assets in the fund and will rise or fall in line with the value of those assets. Like Oeics (but unlike investment trusts) unit trusts and are “open ended” funds, meaning that the size of each fund can vary according to supply and demand of the units form investors. Unit trusts have two prices; the higher “offer” price you pay to invest and the “bid” price, which is the lower price you receive when you sell. The difference between the two prices is commonly known as the bid/offer spread.
Open-ended investment companies are hybrid investment funds that have some of the features of an investment trust and some of a unit trust. Like an investment trust, an Oeic issues shares but, unlike an investment trust which has a fixed number of shares in issue, like a unit trust, the fund manager of an Oeic can create and redeem (buy back and cancel) shares subject to demand, so new shares are created for investors who want to buy and the Oeic buys back shares from investors who want to sell. Also, Oeic pricing is easier to understand than unit trusts as Oeics only have one price to buy or sell (unit trusts have one price to buy the unit and another lower price when selling it back to the fund).
The tax levied on the total value of your estate after you die. IHT has to be paid by the beneficiaries of your estate before they can receive any of the money from it. The money can’t be taken from the value of the estate _– it has to be paid before any money can be released. There is an IHT threshold – known as the “nil-rate band” – below which no tax is levied (£325,000 in 2011/12). Any amount above the nil-rate band is subject to tax at 40%. If your estate totals £600,000, there is no tax on the first £325,000; however your estate will pay 40% tax on the remaining £275,000, a total of £110,000. Prudent tax planning can reduce your IHT liability, so always consult a specialist solicitor.
Everything you own: all your assets (property, cars, investments, savings, insurance payouts, artwork, furniture etc) minus any liabilities (debts, current bills, payments still owed on assets like cars and houses, credit card balances and other outstanding loans). When you’re alive this is called your wealth; when you’re dead, it becomes your estate.
Investors who borrow money they use for investment and use the securities they buy as collateral for the loan are said to be “gearing up” the portfolio (in the US, gearing is referred to as “leveraging”) and widely used by investment trusts. The greater the gearing as a proportion of the overall portfolio, the greater the potential for profit or loss. If markets rise in value, the investor can pay back the loan and retain the profit but if markets fall, the investor may not be able to cover the borrowing and interest costs, and will make a loss. Also used to describe the ratio of a company’s borrowing in relation to its market capitalisation and the gearing ratio measures the extent to which a company is funded by debt. A company with high gearing is more vulnerable to downturns in the business cycle because the company must continue to service its debt regardless of how bad sales are.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
An interchangeable term for shares (UK) or stocks (US). Holders of equity shares in a company are entitled to the earnings and assets of a company after all the prior charges and demands on the company’s capital (chiefly its debts and liabilities) have been settled. To have equity in any asset is to own a piece of it, so holders of shares in a company effectively own a piece proportionate to the number of shares they hold. (See also Shares).
Investment trusts are companies that invest money in other companies and whose shares are listed on the London Stock Exchange. As with unit trusts, private investors buying shares in an investment trust are buying into a diversified portfolio of assets (to reduce risk), which is managed by a professional fund manager. Investment trusts differ from unit trusts in two important ways: they are listed on the stockmarket and so are owned by their shareholders and are closed-ended funds with a finite number of shares in issue. This means the share price of investment trusts might not reflect the true value of the assets in the company (known as the net asset value, or NAV) and if the NAV value of a share is £1 and the share price in the market is 90p, the trust is said to be running a discount of 10% to NAV. But this means the investor is paying 90p to gain exposure to £1 of assets. Investment trusts can also borrow money and use this money to buy investments. This is known as gearing and a geared trust is thought to be more of an investment risk than an ungeared one.