- The value of a Barbie Dream House every Christmas could give your kid a pot worth £9,300 by their 18th birthday
- A £20 a month investment would give your child £6,400 by the time they turn 18
- Giving the full £9,000 Junior ISA limit every year would add up to £240,000 by age 18
Laura Suter, director of personal finance at AJ Bell, comments:
“Whether it’s the impossible task of finding a sold-out toy, not wanting to add to the huge pile of presents, or not knowing what to buy them, lots of parents and grandparents will shun gifts and decide to give money this year instead.
“While it’s easy to default to giving your kids cash or gift cards, lots of parents should consider investing money for their children. While clearly children won’t get the immediate joy from being gifted investments, they’ll thank you when they reach adult life with a tidy pot of money. By ditching each year’s must-have toys in favour of a contribution to an investment account, you could have thousands of pounds stashed away for your child or grandchild.
“Barbie fever swept the nation this year and it’s continuing into Christmas with the Barbie Dream House being one of the most in-demand toys – but at £350 it comes with a hefty price tag. If parents invested that money instead, earning 4% returns a year after charges, it would grow to almost £520 after 10 years. Equally if they give a gift of this value every year and invested the money they’d be giving their child a pot worth £4,370 after 10 years or just over £9,300 after 18 years – which is probably more attractive to an 18-year-old than a toy gathering dust.
“Even trading less expensive gifts for investments can add up. Another top toy this year is a Furby, which many parents will remember from their own youth. But if parents instead invested the £60 price tag they’d double the money after 18 years. If they contributed that same £60 into an investment account every year they’d have savings worth £750 after 10 years, or worth £1,600 after 18 years.
“If you feel like too much of a Scrooge ditching presents altogether, you could just cut back how much you gift and invest the difference. Ditching presents is often easier for younger children – who are more interested in the boxes and wrapping paper anyway. If you make a £100 contribution to your kid’s Junior ISA for their first five years, and then switch to getting them a present, they would have a pot worth £940 when they’re 18.
“Giving money can also be a great way to spread the cost of Christmas over the year. Rather than making a lump sum investment, parents or grandparents can set up monthly investing for the children in their life and contribute a small amount each month. If set up from birth, a £20 a month contribution could give them a pot worth £6,400 by the time they are 18.
“At the other end of the spectrum, the Junior ISA limit is a whopping £9,000, and any parent fortunate enough to be able to put that amount away for their child each Christmas would be handing them a £240,000 present on their 18th birthday. However, for many parents that will be a pipe dream and even squirreling away a little money each festive season will be enough to help your kid out when they’re 18.”
The tax benefit of gifting
Gifting money is a great way to move the assets out of your estate for inheritance tax purposes. Everyone can pass on an estate worth up to £325,000 free of inheritance tax, and some people are eligible for an additional £175,000 limit if they are passing on their main home to certain beneficiaries. But after that the estate will have to pay 40% tax. If you know you’re going to hit this threshold and can afford to part with money now, moving money out of the estate while you’re alive can save tax in the future.
Anyone can gift up to £3,000 a year, as well as extra amounts when certain people in the family get married, without it being considered for inheritance tax purposes. Any gifts over that amount will be subject to the seven-year rule, which means that if you were to die inheritance tax is due on a sliding scale until seven years have passed.
