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Saving for kids at Christmas: my six best ideas

The second gift is most relevant here. What all children definitely need is an investment account. Grandparents are often keen to buy children lots of toys but, speaking from the parent's point of view and the perspective of a small home, we'd rather have the boring investment account donation instead. And in 18 years' time we'd rather have the young adult that has learnt to be truly appreciative of the things they receive as gifts - and can afford to go to university.

Think of the long-term legacy that you are leaving for future generations. Adrian Lowcock, head of investing at AXA Wealth, says: "While a financial gift may not seem very traditional, it is likely to be more enduring and remain long after the other gifts have been forgotten."

Of course, there is no harm in buying a present as well, but choose carefully, with my preference being for paper rather than plastic. You could buy them a copy of the 1957 Christmas story How the Grinch Stole Christmas by Dr Seuss, to reinforce the frugality lesson for children. The 2000 Jim Carrey film sends good messages, too.

Here's an extract from The Grinch: "It came without ribbons. It came without tags. It came without packages, boxes or bags. And he puzzled and puzzled 'til his puzzler was sore. Then the Grinch thought of something he hadn't before. What is Christmas, he thought, doesn't come from a store. What is Christmas, perhaps, means a little bit more."

Just as most plastic toys bought for Christmas will be broken by March, many savings plans specifically aimed at children won't make the best gifts as they are hampered by high fees or mediocre performance.

But if you choose carefully, and get it right, then you can give a child a big financial boost and maybe establish a lifetime love of investing along the way. We've seen two burgeoning instances of this in Portfolio Clinic, most recently the case of 21-year-old Emma who was excited about taking on the management of an individual savings account (Isa) and self-invested personal pension (Sipp) that her father had set up for her when she was a baby.

IC reader Alan Wilson earlier this year sent me a lovely photo of his baby granddaughter reading the Investors Chronicle. He said: "Is my granddaughter your youngest reader? It may be worth a look at someone with no assets as part of Portfolio Clinic."

The responsibility certainly feels greater when investing on behalf of a child rather than on your own behalf. You may want to take lower risk if there are only a few years before they will need the money. Alternatively, you might see a young person's long time scale as an opportunity for much higher-risk investments.

Here are six ideas.

 

Premium bonds

Nearly half the UK population has investments in Premium Bonds from NS&I - they're by far the biggest savings product, with more than £54bn invested.

You can invest from £100 and the odds of winning a monthly prize for each £1 bond number are 26,000 to one.

In December 2010 I won £25 on Premium Bonds. It was a small amount, but considering my initial investment of £100 in 2005 (sold in December 2010), it was a great return - averaging 5 per cent a year over a period when Bank of England base rate averaged 3.4 per cent a year. I sold the holding straight after my win but like to tell the story as proof that despite the grumblings of conspiracy theorists, small holdings in Premium Bonds do win occasionally.

Until the child's 16th birthday the parent or guardian nominated on the application looks after the bonds, regardless of who buys them.

NS&I will send the bond record, any prizes won and payment for cashed in bonds to the nominated parent or guardian until the child is 16.

Upside: The chance every month to win a £1m jackpot and other tax-free prizes. 100 per cent security for your money. All prizes are tax-free.

Downside: No interest earned. Not suitable if you are worried about inflation eroding the value of your savings. The annual prize fund interest rate is just 1.35 per cent.

Where to buy: http://www.nsandi.com/ Tel: 0500 500 000.

 

Savings account

You can set up an account with a bank or building society on behalf of a child of any age. However, for the account to be in the child's name they will need to be at least seven. The advantage of savings is that they are easy to understand and operating an account teaches kids valuable lessons about money that will stand them in good stead in later life.

Upside: Dedicated children's savings accounts often boast the most generous interest rates on the high street.

Downside: Might not keep pace with inflation. Dan Brocklebank, director of Orbis Access, says: "Putting money occasionally into a cash savings account is unlikely to scratch the surface of children's potential financial challenges in early adulthood, such as university fees and a house deposit, so parents should seriously consider equity-based investments to give their children a good financial start."

What to buy: Halifax Kids' Regular Saver account is paying 6 per cent. This allows savings per child of £10 to £100 a month. But the rate is guaranteed for only a year and interest is paid at the end. http://www.halifax.co.uk/savings/accounts/junior-savers/

 

Gold coin

The Association of Investment Companies (AIC) 2015 annual poll of member investment company fund managers found that 10 per cent think gold could outperform in 2016. Gold peaked at $1,837.67 an ounce (oz) on 25 July 2011 and as at 15 December 2015 it was trading at $1,063.13 an oz.

Upside: Mankind has been fascinated by gold for more than 4,000 years - from the Bronze age through to modern city finance. Your kids will be, too - it's something solid to appreciate and admire. Gold continues to be in demand by investors in times of crisis.

Downside: It's difficult to value. It does not generate an income. Some say gold won't appreciate if US interest rates rise. The gold price is currently at a low because it has been falling ahead of the US Federal Reserve's December decision on interest rates. Non-yielding commodities such as gold do not like higher interest rates, which boost income-generating assets.

What to buy: Royal Mint sells limited edition gold coins starting from £50 for the Britannia 2015 Fortieth-Ounce Gold Proof Coin. http://www.royalmint.com/our-coins/ranges/gold-coins

Or you can buy gold bars from the Royal Mint Refinery starting from £40.66 for 1g.

 

Junior Isa

The Junior Isa celebrated its fourth anniversary in October. It's a tax-efficient plan to help parents and guardians build up a long-term savings pot for their children. As a Junior Isa can only be accessed at age 18, for young children these are really long-term investments and should be invested in equities.

However, 72 per cent of all Junior Isa accounts are held in cash, with only 28 per cent in stocks and shares. Jason Hollands, managing director of Tilney Bestinvest, says: "While a cash-based Junior Isa might make sense for a 16 or 17-year-old looking to use the cash shortly, it is a terrible place to park wealth for the long term as the real value of the capital will be eroded over time by inflation."

He also points out that cash-based Junior Isas are arguably redundant because the first £1,000 of interest on any savings account will be tax-free for non-higher-rate taxpayers with effect from 6 April 2016.

Any child with a Child Trust Fund can now convert it to a Junior Isa to take advantage of more investment flexibility and potentially lower charges. Some of the funds available in Child Trust funds are simply index tracker funds, but charge 1.5 per cent a year - way too expensive for a passive fund.

Upside or downside (depending on your point of view): Cash is locked away until the child is 18, when the child has full access to the money (and parents lose control of it).

Investments to buy from the IC Top 100 Funds:

Scottish Mortgage Investment Trust (SMT) is a high-conviction investment portfolio that backs growth companies from across the globe and has a low ongoing charge of 0.48 per cent.

Witan Investment Trust (WTAN) takes and actively manages a multi-manager global equity approach that gives investors access to a talented stable of managers, many of whom are not accessible to retail investors. Under the management of Andrew Bell it has consistently beaten its benchmark.

 

Investment trust savings scheme

Investment trust savings schemes remain a popular way to drip-feed money into a trust at a very low cost and most mainstream investment trust houses offer them. Over 18 years to 31 October 2015, a £100 investment into the average investment company has grown to £428, while a £100 lump sum invested annually each year, for 18 years, has grown to £4,724. While there's no telling what the future will bring, today's 18-year-old would be pretty happy.

Upside: Parents can have more control over the money than with a Junior Isa.

Downside: You are usually tied to one trust or trust provider.

What to buy: Many groups have launched schemes specifically designed for children's savings. Those include Aberdeen, Alliance Trust Savings, Witan and F&C. Most of those operate designated or bare trust options, which get around the issue of under 18s not being able to hold company shares in their own name. Some other providers have a gift facility that includes children.

 

Pension

A pension is the most tax-efficient way of saving for a child - you can save £3,600 a year (the maximum allowed) into a pension for a newborn child from birth and only have to make a net investment of £2,880. Plus, after seven years it will pass completely out of your estate.

Upside: The ultimate long-lasting most tax-efficient legacy for a child. Compound interest can work wonders for the child's future.

Downside: Grandparents are unlikely to be still alive to see their grandchildren enjoying the income from the pension.

What to buy: For regular £100 a month contribution or £1,000 minimum lump sum, Fidelity's Junior Sipp looks good value as there's simply a flat 0.35 per cent annual charge that covers everything except for underlying fund charges. In terms of investment choices, however, the Fidelity Junior Sipp is limited to offering open-ended funds. If you want shares and investment trusts, too, then consider Hargreaves Lansdown which charges 0.45 per cent a year and £11.95 per trade.