The best festive saving choices for children

A press release arrives. “Give the Christmas gift children really want,” it says. “Money.” Apparently some 64% of children aged 8 to 16 say that they would prefer to have money to an actual gift this year. Why? “They want to be able to get what they want rather than be surprised.” How’s that for lack of festive spirit?

The press release comes from an organisation called PKTMNY, which styles itself as a facilitator of “pocket money for the digital age” (see this week’s cover story for more on digital money) and so provides pre-paid Visa cards for children that parents can top up for them to use.

I’m not crazy about this idea. It seems to me that learning about pocket money with actual cash – physical stuff that, unless you are the Bank of England, can actually run out – gives a better learning experience than going straight into the land of cards and virtual money. If you disagree, want your children to set up a financial wish list and to get them a card, you can visit and do just that.

If you’d like to give them money but in a slightly more long-term way, there are better options.The obvious one is premium bonds. However, I’m not sure I’d bother with these any more. The minimum purchase is £100 and the maximum holding £30,000 but, however many bonds you hold, the odds of you winning a million, or even £25, aren’t that high (24,000 to one) and the overall average interest rate of 1.5% isn’t exactly attractive (particularly if, like me, you never seem to see any payouts at all).

Another oft-quoted option is to give your child or grandchild a pension. You can pop up to £2,880 (boosted to £3,600 with tax relief) into a Junior Sipp (self-invested personal pension) or stakeholder pension for a child or grandchild. If you keep topping this up and it compounds as it should, it will give your child an amazing headstart in the retirement stakes. Figures from Hargreaves Lansdown suggest that if you put £300 a month into a pension from birth to age 18, and it compounds at 5% a year, your child will have £1.03m on retirement. But I’m not sure I’d do this either.

The pensions system sounds good, but it is stunningly expensive for the state (think £26bn in tax relief on pension contributions last year alone) and so likely to be fiddled with endlessly over the next few decades. That matters, for the simple reason that once you put money into a pension, you can’t take it out – you have put it at the mercy of the state (and its black hole of debt). That might be a good idea. But it might not be. Why take the risk with your children’s or grandchildren’s money?

The best option then is probably a Junior Isa (individual savings account). You can put up to £3,600 a year into these in either cash or shares (and unlike with an adult Isa, you can switch freely between the two). The tax benefits are the same as those for an adult Isa (no capital-gains tax within the wrapper, and no dividend tax beyond the 10% withholding tax everyone pays), and they can also be converted into adult Isas when your child hits 18. There’s even a rather nice – if short – period when your child is between 16 and 18 when they are entitled to have both a Junior Isa and an adult cash Isa.

Finally, if you want to give a physical thing rather than virtual money, we would suggest, as we do most years, a gold coin or two. They’re always nice to have knocking around – however old you are. Suppliers include Baird & Co, ATS Bullion and Chard.

  • Nick Fury

    There’s so many catches and low interest rates with any child’s account especially considering the fact that the institution you’re saving with can be quite sure you are going to leave the money there for a very long time. I’ve been saving for my son for a while now and can’t see the benefit of any of the child savings vehicles. The Halifax childs regular saver (6%) & N&P BS regular saver (5%) seems the best to me (tax free interest as a child; even if the parents take a 20% tax hit for it down the line, not sure if you’re a 40% tax payer though). We can’t have a JISA as he has a Child Trust Fund already (poor interest though; even if tax free 2.5%). Any other suggestions?

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