The festive season is a great time to make a long-term difference to the lives of your children and grandchildren.
Frantic food preparation and gift shopping aside, Christmas can be a rather enjoyable time. Indeed, it offers a rare opportunity to reflect on the past year and make plans for the future – and all while enjoying plenty of food and the odd tipple.
Perhaps the most precious part of the festive season, however, is the opportunity to spend quality time with family. In fact, watching the kids and the grandkids open up presents left for them under the tree is undoubtedly a highlight for everyone involved.
But where the latest games console or smartphone will undoubtedly bring one’s youngsters a great deal of instant delight, offering them a helping hand into the world of saving and investing is a present that will continue to provide for them long after Christmas Day passes.
Protecting against the future
To avoid any comparison with Dr Seuss’s Grinch here, we aren’t saying that children shouldn’t get any presents this year. Rather, our point is that younger generations today are coming up against unparalleled uncertainty when it comes to their financial future.
For example, there's the chance¹ that the economic, social, and cultural effects of the pandemic could haunt us for decades. Likewise, there’s monumental uncertainty around how Brexit will play over the long-term, exacerbated by ongoing concerns around employment, wage growth and inflation.
And that’s just on the macroeconomic side – many are also now expecting² an imminent UK pensions crisis due to the fact that massively inadequate amounts of money are being put into long-term savings.
But before we ruin Christmas completely, the point here is that the earlier today’s youngsters receive monetary support and learn about the value of saving and investing, the greater their protection against potential financial hurdles in the future. The good news, then, is that parents and grandparents can easily assist their offspring on this journey in a highly tax-efficient way.
Let’s take a look.
The gift of saving and investing
Gifting money to children this Christmas is a great way of setting them up with a lump sum that can help them to learn about the value of savings and, possibly, even investing.
UK adults each have an annual exemption of £3,000 that they can gift to their children or grandchildren without worrying about inheritance tax. You can also carry forward an allowance not utilised in a previous year, but only as a one-off. This means in one discrete year, an adult could gift £6,000.
With this in mind, it is worth noting that there is a £100 limit on the interest earned that a child under the age of 18 can receive per annum from a gift from a parent. However, this restriction does not apply if a grandparent makes the gift.
Small gift allowance
You also have what is known as a small gift allowance of £250 per annum, which can be distributed to as many people as you so wish, with just one caveat. The recipient must not be someone to whom you have made another gift – such as the £3,000 allowance.
This is ideal for birthday gifts and Christmas gifts to loved ones.
Junior ISAs enable parents and grandparents to build up tax-efficient savings or investments for a child of up to £9,000 per annum each tax year.
The tax benefits are the same as an adult ISA, with no capital gains or income tax, but withdrawals are only possible from the age of 18 when it automatically converts to an adult ISA.
Of course, there’s obviously the risk that, once the child gets access to the funds in their Junior ISA at age 18, they may opt to spend all or some of it for a purpose other than what was intended. But, once again, this really underlines the importance of educating children on the value of saving and investing at a young age.
And when it comes to this value, the impact of long-term compounding is nothing to be sniffed at.
If a child’s parent was to save £50 a month consistently into a Junior ISA generating an investment return of 3% annually for 18 years, it would be worth £14,297 ³.
It may seem a little premature to start saving into a pension for your child or grandchild, but there is a significant incentive with the Government topping up your contribution by 20%. So an annual payment to a Junior SIPP of the maximum £2,880 net would receive a Government top-up of a further £720 per annum, making a total gross investment of £3,600.
Anyone can put money into a Junior SIPP as long as it is within the £3,600 annual contribution, which includes the 20% tax relief. This really is a great way to help build funds for your child's future as the money is tied up until they reach retirement age, which is set to increase from the current age of 55, so this pot of money cannot be accessed at any time soon. You might even consider using the aforementioned annual gifting allowance of £3,000 as a means of funding Junior SIPPs.
Supporting the family
Christmas will always be a time for fun and family – this year more than ever after its effective cancellation for many in 2020. But after you’re done tucking into that extra mince pie and that glass of sherry, it could be worth considering how using your full gift allowance or opening a Junior ISA or Junior SIPP could benefit both your family and your own tax bill as we move into the New Year and beyond.
Sources & Notes:
 This figure does not represent a personal illustration. It only represents potential savings over the term and is not an indication of future performance. The calculation does not include any product, advice or investment management charges.
The contents of this article are for information purposes only and do not constitute advice or a personal recommendation. Investors are advised to seek professional advice before entering into any investment decisions. Please also note the value of investments and the income you get from them may fall as well as rise and there is no certainty that you will get back the amount of your original investment. You should also be aware that past performance may not be a reliable guide to future performance.