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Don’t give your children toys for Xmas, give money

If you give your children or grandchildren fashionable toys for Christmas they’ll soon forget about them – so put some money to work for them instead.

Children with money boxes
The MoneyBox Tree: a magic money tree for children

Copyright Ⓒ 2016 Kirsty Mattsson

The top toys for this Christmas include a Barbie Dream Plane and a Lego Knight Bus. These gifts may go down well on the day, but eventually they are likely to end up in landfill or at the local car-boot sale when your children or grandchildren get fed up with them. So how about breaking with tradition this year and giving the gift of cash?

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"Giving cash is sometimes seen as impersonal or not very thoughtful, but when children have more toys than they know what to do with, it can be the ideal present," says Kalpana Fitzpatrick in Good Housekeeping.

Giving cash doesn't have to mean just stuffing notes into a festive card. There are several ways you can improve your children or grandchildren's financial position.

Your first choice could be to add to, or open, a Junior Isa for them. Parents can open an account and then anyone can add to it up to an annual limit of £4,368. The money can then grow tax-free until the child turns 18. At that point it automatically converts into an adult Isa and they can withdraw the cash or leave it to carry on growing.

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Alternatively, a grandparent can open a standard savings account for a grandchild, "provided you have access to the necessary documents, such as their birth certificate", says Harriet Meyer in Saga.

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Bear in mind too that "children rarely pay tax, as they can earn up to the personal allowance tax-free". That means they would have to earn more than £11,850 a year before income tax became an issue. However, the advantage of a Junior Isa is that it is protected from tax for life. So when the child is older and does start earning money and paying tax, the Isa will still be shielded from the taxman.

A very popular way to give children money is to buy them Premium Bonds. National Savings and Investments (NS&I) has changed Premium Bonds this year so now anyone can buy them for children and you can invest as little as £25. No interest is paid on Premium Bonds, but the holder can win anything from £25 to £1m tax-free each month. Parents can buy the bonds for children under 16 online. If you are buying for a grandchild or someone else's child, you'll have to apply by post.

Cultivate the saving habit

Want to give something that can be unwrapped on Christmas day? How about buying a piggy bank so you can help encourage a saving habit. Children can slot pound coins into Coin It In's MoneyBox Tree and see their pot gradually building up over time. This could be a helpful visual aid to help teach children about saving.

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If you want to play the long game, then you could also consider contributing to your grandchild or child's pension for Christmas. "You can start to save for a child's retirement fund from birth with a Junior Sipp [self-invested personal pension]," says Fitzpatrick. Any money paid in benefits from tax relief and there is an annual cap of £3,600 (£2,880 plus £720 basic-rate tax relief).

The money will be locked away until the child is 55, but £300 a month deposited with a 5% annual return would create a £104,760 pot after 18 years. That would then rise to £1.037m by the time the child turned 65, assuming a 5% annual growth rate.

Finally, you could take your gift inspiration from the three wise men. Gold coins cost from around £130 via the Royal Mint. Just make sure the gold is stored safely and if it is kept at home it must be covered on your home insurance policy.

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