Best homes for children's Christmas money

So when Claer Barrett, a former associate editor at the Investors Chronicle, told me that her teenage step son has asked for his Christmas present this year to be something quite different from the usual request for clothes and Xbox games, I wasn’t surprised. "It turns out that what Ben wants for Christmas (now he is 18) is a FTSE All-Share tracking individual savings account (Isa)!" she says. "I hope you are impressed. The best for fees I can see is the HSBC FTSE All-Share Index Fund at 0.25 per cent. The youth of today, eh?"

Adding a financial gift to a child’s Christmas list makes sense, considering the average a parent spends on a child at Christmas is £134 (according to 2012 research by The Co-operative Insurance). Annabel Brodie-Smith, communications director at the Association of Investment Companies, says: "Christmas wouldn't be Christmas without an abundance of toys, but we are all aware of the limited shelf life of some presents that are opened and quickly forgotten. So it's perhaps not surprising that some people want to make a more lasting contribution to their child's savings."

For me, the two most important rules around saving for children are:

1. Fully fund your own individual savings account (Isa) and pension first. There is no point having a separate savings pot for children if you haven't got your own long-term investments under control. Even if you have, you can designate your own annual Isa allowance (£11,520 for tax year 2013/14) for a child, while making sure that it is fully under control and they don't automatically get the money at age 18.

2. Make sure you have a 'saving for children' conversation with all family members. Can grandparents contribute? Many want to but don't want to broach the subject and are waiting for you to bring it up. Grandparents themselves could start the conversation with a simple: "I was thinking of putting something aside for Liam and Emma’s* education." Christmas is the perfect occasion to start this conversation, when different generations are together in the same room - or on the same afternoon walk.

*The most popular baby names for 2013 according to BabyCenter.

Best homes for Christmas cash

The first choice for Christmas cash is a children’s savings account. The best deal according to Moneyfacts.co.uk is the Halifax Kids’ Regular Saver account. This is a fixed 12-month bond that pays 6 per cent interest. However, you have to put money aside on a monthly basis over the term (between £10 and £100 a month), so it will not be suitable for Christmas cash only.

Halifax and Lloyds Bank both have instant access Young Saver accounts that pay 3 per cent annual interest on as little as £1 up to a maximum £20,000. However, the Lloyds account is a linked product - an eligible adult must have a Lloyds Bank current account.

Children are entitled to income tax allowances in the same way as adults so depending on their income they may or may not be taxpayers. If a child is eligible to receive savings interest free of tax, their account can be registered for gross interest with HMRC Form R85. Parents or guardians will have to do this for children under 16.

However, if money given by a parent produces interest of more than £100 a year, the interest will be treated as the income of the parent for tax purposes. This rule does not apply to money given by others, including grandparents.

All children can have an allowance (£3,720 for tax year 2013/14) that can be invested in a Junior Isa or Child Trust Fund. This can be in cash or stocks and shares. If your child is eligible, there are some good rates for Junior Cash Isas. Your child can have a Junior Isa if they are under 18, live in the UK and weren’t entitled to a Child Trust Fund account. Coventry Building Society and Nationwide offer the highest Junior Cash Isa rates at 3.25 per cent. It is always worth checking your bank or building society for higher-paying 'branch only' offers, or ones linked to your adult account.

For example, Halifax offers a 6 per cent tax-free variable rate if an adult cash Isa is held or the child is 16 and over. If an adult Halifax Cash Isa isn’t held, the standard Junior Cash Isa rate (3.00 per cent tax free/AER variable) will apply.

Rosie Carr, the Investors Chronicle’s deputy editor, says: "I'm transferring my own cash Isa savings account to the Halifax to secure the 6 per cent Junior Isa rate. It's not just that it's a decent rate - and one that really stood out after years of being starved of good deals - it's that I want my two children to see for themselves the magic of compounding and to understand that saving does pay rewards. That's not something they ever noticed on rates of below 1 per cent."

If your child, like mine, was born between 1 September 2002 and 2 January 2011, you’ll have to make do with the inferior rates available via Child Trust Fund savings accounts. Only a limited amount of providers offer CTFs, as many consider them big work for little reward.

The top picks are the CTF from Skipton Building Society which pays 2.65 per cent AER and is also totally 'clean', ie there's no bonus which drops after an intro period. The next best account is from Yorkshire Building Society, paying 3 per cent AER, with 0.7 per cent of that being a bonus that lasts for 12 months.

Money lessons

It is very important that whatever account you choose, you involve the child in the decision and management of the account, so that they can see how the money grows over time.

And over the course of 2014, make sure you also take some time to teach children about the value of money. Here are some IC readers’ stories about how they learnt valuable money lessons:

Martin Knowles says: "I was 16 and in April my father, a farmer whose apple crops paid him annually, gave me my allowance for the whole year in one wallop. I gorged on the ice creams and chocolates at the school shop all summer, but winter came and my clothes were shabby and shredded and my underwear desperately inadequate for one of the worst winters on record with no central heating in those days. I suffered but my father was adamant - no advance on next year’s allowance due in April (and held my mother at bay!). From then on I learned annual budgets - clothes, sweets, travel etc, until today in my accounts there are pockets for everything before indulging in such delights as investment portfolios."

David Crawford says: "I can still hear my late and very wise father saying 'You can't have what you can't afford'. I can even recall the exact spot where he said it. In 1956 I was aged seven and used to receive 9 pence pocket money per week. I wanted to buy a Match Box toy which cost 1 shilling and 6 pence. I asked my father if I could have the following week's money at the same time, when he replied that I had to keep that week's money and wait a week until I had a further 9 pence."

Sean Cardwell says: "When my son went on any school trips, I used to give him £5. I always said whatever you have left, you can keep. This encouraged my son not to buy any rubbish and save his money. I always thought that some parents would take any money left over from their child, leading the child to spend all the money as they would have what was left taken off them. I think this encouraged my son not to buy things he didn’t need from an early age."

Grandparental help

Grandparents in particular are playing an ever-increasing pivotal role in the financial support of grandchildren, particularly with respect to university education and housing.

One-fifth of grandparents in England aged 50+ gave money to grandchildren - totalling over £647m - in 2010, according to the International Longevity Centre-UK. The £333.9m given to grandchildren (excluding money put in Child Trust Funds) is equivalent to the fees for over 100,000 undergraduate placements in 2010. Polling conducted by Key Retirement Solutions in conjunction with the ICL-UK report found that just under 3 per cent of grandparents have helped fund education costs for grandchildren, but the proportion expecting to do so in the future will increase to 13 per cent in the next 10 years. This may signal a fundamental shift in the distribution of wealth across the life course, as older people search for strategies to fund both their own retirement and the aspirations of their descendants.

Here are some ideas for Christmas presents with a longer lifespan that may appeal to family members who want to leave a legacy.

1. Pension for a child

For an ultimate long-lasting legacy (which may particularly appeal to grandparents) you can put £2,880 a year into a pension, such as a self-invested personal pension (Sipp) on behalf of a child. When topped up with income tax relief (which happens automatically for children’s pensions) this becomes a gross contribution of £3,600.

Under current pension rules the child will not be able to access this until he or she is at least age 55. Nicholas Oliver, divisional director of financial planning at Brewin Dolphin says: "Putting £300 a month into a child or grandchild's pension not only will likely turn them into pension millionaires when they retire, but during their working careers, they can use their fund for commercial property, even if it is linked to their business. This is useful for future lawyers, vets, plumbers and farmers - helpful for a debt-laden generation."

Candid Money has done a comparison of low-cost Sipp providers. It found that if you are investing £100,000 between eight popular funds, the cheapest provider is Alliance Trust Savings, while for a £100,000 portfolio of 10 shares with four trades the cheapest was AJ Bell Youinvest.

2. Stocks and shares Junior Isa contribution

All children can invest in stocks and shares via a Junior Isa or Child Trust Fund (the allowance is £3,720 for tax year 2013/14). Unfortunately, the Child Trust Fund generation faces higher charges and less flexibility in terms of investment choice. The government has consulted on allowing CTFs to be transferred into Junior Isas but has not yet reached a decision, reportedly because it would signal the death knell for many of the the UK’s Friendly Societies, which have half of the CTF market. The Association of Financial Mutuals, the industry body representing the smaller players in the CTF provider sector says that many of its members would go to the wall were CTF transfers into Junior Isas allowed.

Some of the best value and most flexible stocks and shares Junior Isa and Child Trust Fund accounts are those offered by The Share Centre. You can choose from a full range of funds, investment trusts and direct shares.

The question is where to invest the child’s money? Eighteen-year-old Ben’s HSBC FTSE All Share Tracker Fund (GB0000438233), mentioned earlier, is not a bad place to start.

Alternatively, why not introduce your child to the stock market with a solid blue-chip share that they are likely to be familiar with? Shares that a child is likely to identify with and enjoy holding that are currently rated 'buy' or 'hold' from Investors Chronicle include: International Consolidated Airlines Group (IAG), Mothercare (MTC), Vodafone Group (VOD), J Sainsbury (SBRY) or Thomas Cook Group (TCG).

The middle ground between passive funds and direct shares would be a global growth investment trust or investment company such as Witan (WTAN), recently tipped as a ‘buy’ at 644.5p by the IC. Investment trusts and investment companies are closed-ended collective investment funds that are traded like shares. Global growth trusts invest in globally diversified portfolios of stocks and shares. You can see recommendations for these and other actively managed funds in the IC Top 100 Funds 2013: http://www.investorschronicle.co.uk/funds-and-etfs/top-100-funds

You could also pick a global growth investment trust from among the following investment company Junior Isa providers below. If you had invested the current annual Junior Isa limit of £3,720 in the average investment company18 years ago you would now have £15,763, according to figures from the Association of Investment Companies.

Investment Trust Junior Isa providers

Source: AIC

3. Investment trust savings scheme

If you have money to invest beyond your own and your child’s Junior Isa and pension allowances, then consider an investment trust savings scheme. These are available from as little as a £50 lump sum or a £25-a-month investment.

According to the Association of Investment Companies, a lump sum investment of £1,000 made 18 years ago in the average investment trust or company would be worth £4,240 to 30 November 2013. A £50 a month investment over 18 years in the average investment trust or company would be worth £26,171 at 30 November 2013.

Investment Company Children’s Savings Scheme Providers

Source: AIC