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Give them the gift of saving this Christmas

Emma-Lou Montgomery

Emma-Lou Montgomery - Fidelity Personal Investing

Christmas is the most wonderful time of the year – or so the song goes – and with six weeks to the day to go and the festive spending frenzy starting, the UK’s beleaguered retailers will be hoping British shoppers stick with tradition and spend like it’s, well, Christmas.

From turkey to travel costs, and not forgetting a mountain of presents, there’s no doubt that Christmas is an expensive time of year.

It’s Christmaaaaaaaaaaas!

According to the figures it’s certainly true that most people dig deep over the festive season - especially on gifts. Those aged 35 to 54 anticipate spending the most, at £465 on average each, while the over 55s expect to spend £414. Cash-strapped 18 to 34 year olds are the most reserved with their Christmas spending, forking out £359 each, on average.

But while everyone else is spending their evenings and weekends shopping online and last minute shoppers will find themselves flocking to the high street, how about stepping back from the festive splurge and giving a gift that will last long after Boxing Day?

Christmas is for kids

According to research by Saga Money, over 50s have on average three grandchildren and while one in 20 grandparents say they will spend more than £100 on each grandchild, all the rest will spend £65 on each one of them at Christmas. The most generous are those who live in London and Scotland and tend to spend more than £75 on each grandchild.

But if keeping up with the kiddy trends and crazes is more headache-inducing than that Slade song, then how about topping up your child’s Junior ISA instead this Christmas?

Most children will already have a Junior ISA, in their name, so one way to give them a gift that keeps on giving (in growth terms at least, while it’s invested) is to consider contributing to that. The £50 or so you usually spend on toys can be put to far better use invested for their future. It’s simple to pay into the Fidelity Junior ISA.

As a parent, grandparent, aunt, uncle, godparent or even a generous friend, you can contribute to their Junior ISA without it impacting on your own ISA allowance. A total of £4,260 can be added to each child’s ISA every year, where the investments can grow, free of tax, until the child is 18.

What should I invest in? Now, when it comes to choosing how to invest, there is a big difference between investing for a child of six months and a young adult aged 16 years - and I’m not just talking about the begrudging grunt that you’ll have to accept as acknowledgement of your gift from the 16-year-old. Their age also influences what you should invest in.

A baby or very young child has a much longer time horizon in which to allow the money to grow. So you can afford to invest the money in higher-risk funds. You could, for example, invest in an emerging markets fund such as Fidelity Emerging Markets Fund or gold with the Investec Global Gold Fund.

Just bear in mind that a 12 or 13-year-old has far less time for that money to be ‘locked away’ out of temptation’s reach and given a chance to grow, so a lower-risk fund is a better option. For a 16-year-old with a possibly only two years to go before they access the ISA, it may be better to put the money into cash.

Access all areas

At the age of 18, the Junior ISA can be accessed by the child, although they don’t have to take the money and run. What actually happens is that the Junior ISA is automatically converted into a regular, adult ISA that will carry on growing as before – that is unless the now adult child decides they would rather spend it instead. And it is their prerogative.

Savings boost

At the age of 16 a child can open a regular cash ISA in addition to holding a Junior ISA. Both ISAs will grow tax-free and enable you/the child to invest more on their behalf. This ability to hold two separate ISAs at the same time means that 16 and 17-year-olds have a greater personal ISA allowance than any other investor – with a current allowance available to them of £4,260 in a Junior ISA and an additional £20,000 in an adult cash ISA.

Parents beware

This only applies to parents, not grandparents or anyone else but if, as a parent, you give your child money to save while they’re under the age of 18, and they earn more than £100 in gross interest on it, you could find yourself liable for tax.

This only applies to money invested outside a Junior ISA, anything within an ISA is exempt. This also applies for each parent. If the interest is more than £100 for each parent’s gift, then it will be treated as that parent’s interest for tax purposes and they will need to pay tax at their marginal rate. Gifts from other family members or friends will not be taxed.

Start a pension for them

If you are worried about giving a teenager access to a large sum of money in one go, another option is to save into a pension on behalf of the child. Here, the money is kept safely out of reach until they are at least 57 from 2028, under the current pension rules.

Each child can have a total of £3,600 a year, or £300 a month, saved into a pension. Just as with your pension, the Government automatically tops up payments you make by 20%, so for your child to have the maximum £3,600 a year, total contributions only need to come to £2,880.

By saving into a Junior SIPP  you can make sure this year’s Christmas gift goes towards helping them have a financially secure future many, many Christmases away.

Important information

The value of investments and the income from them can go down as well as up, so you may not get back what you invest. Tax treatment depends on individual circumstances and all tax rules may change in the future. Withdrawals from a pension product will not be possible until you reach age 55. Junior ISAs are long term tax-efficient savings accounts for children. Withdrawals will not be possible until the child reaches age 18. A Junior ISA is only available to children under the age of 18 who are resident in the UK. It is not possible to hold both a Junior ISA and a Child Trust Fund (CTF). If your child was born between 1 September 2002 and 2 January 2011 the Government would have automatically opened a CTF on your child’s behalf. If your child holds a CTF they can transfer the investment into a Junior ISA. Please note that Fidelity does not allow for CTF transfers into a Junior ISA. Parents or guardians can open the Junior ISA and manage the account but the money belongs to the child and the investment is locked away until the child reaches 18 years old. This information does not constitute investment advice and should not be used as the basis for any investment decision nor should it be treated as a recommendation for any investment. Fidelity Personal Investing does not give personal recommendations. If you are unsure about the suitability of an investment, you should speak to an authorised financial adviser.