Children's gifts with a future

Published by Liam Tarry on 02 December 2008.
Last updated on 23 August 2011

A mother and child

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, 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.

Share certificates

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.


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