With the economic gloom all around us, should this Christmas have been more about giving than about shopping?
A spate of surveys before Christmas suggested that lavish presents are still an essential component of Christmas for most households, particularly if there are excitable young kids to spoil.
The parenting group iChild, in conjunction with F&C, found that families expected to spend an average of £200 on presents for each child, with the tradition of writing letters to Santa Claus still alive and well.
But unwanted gifts are likely to already have found their way to the loft, the charity shop, or the online auction, according to a survey at new year by website Gumtree. It claimed astonishingly that Brits are sitting on £2.4bn of unwanted Christmas presents.
Even though we've been told to spend our way out of recession, our overall appetite for shopping has, of course, been dampened by the high cost of goods, rising bills and a decline in our disposable income. All of this should really have prompted us to look harder for presents that matter in the long-term, like investments and savings.
This is especially the case with children, who are pretty unlikely to write to Santa and ask for the hottest bonus bond around.
But a well-chosen investment option for your child could be a far more valuable present than that Justin Bieber singing doll. Otherwise, let’s face it, your child may struggle to meet the soaring costs of university tuition and the huge deposits now required to buy a house when they grow up.
Children's savings accounts are fine, but there are usually time limits on the best rates, and limits on the contributions allowed. Scottish Building Society’s u:Account is the pick of the bunch, paying up to 4% for regular monthly contributions, though you can get 4.25% in Clydesdale Bank’s Child Savings Bond if you have a lump sum to lock up for five years. The best rates on flexible accounts are Northern Rock’s Little Rock Access and Lloyds TSB’s Young Saver, both paying 3%. All rates correct as at 04/01/2012. While these might suit those who don't want to lock away vast sums of money for a long time, they also pose a massive temptation. Parents could find themselves dipping into the savings every so often, thus diminishing the potential returns for their child in the long run.
For those who can commit to making contributions, a long-term investment savings plan could be a far more rewarding present than a children's savings account, partly because of depressed rates from banks and building societies at the moment but also because equities have historically outperformed cash in the long-term.
So with harder times ahead, how about a new year’s resolution to focus on gifts with a seriously long shelf life? That’s the call from Annabel Brodie-Smith at the Association of Investment Companies, who says: “Whilst we all want our children to wake up to lots of presents, an investment on their behalf now can provide a welcome boost in the future when they face university or housing costs. Investment companies are a good way to tap into the long-term benefits of the stock market.”
Investment companies cover a range of sectors, countries, and risk profiles, so you have plenty of choice regarding your investment portfolio. You can use a bare trust, a designated account or even the new fangled Junior ISA. Here, parents, grandparents and family friends can invest up to £3,600 in total each tax year into a Junior ISA and the money has the potential to grow tax-efficiently until the child reaches 18, whereupon it can roll over into a regular ISA or be accessed by the child.
A seasonal survey by one investment company manager discovered that 23% of respondents would contribute to a Junior ISA for the child of a friend or relative, as they felt it was a much better alternative to buying a flash present.
There are still three months to go in the current tax year and with a fresh £3,600 Junior ISA allowance kicking in after 5 April investors should consider the costs – with some around 1% per annum. There are alternatives that might save you hundreds of pounds in management fees. The underlying investments of these alternatives might be exactly the same as those in the Junior ISA wrapper but more of the returns may find their way to your child's purse in the long term.
There are regular investment trust children’s savings schemes that have no wrapper costs or dealing fees although other charges such as stamp duty will apply. There are also no maximum investment restrictions, so you're free to contribute however much you like. The use of tax allowances or bare trusts can reduce tax liabilities, and the standard designated account option gives more control to parents and grandparents if required.
There are many routes you could go down, so make sure you do your research, understand your appetite for risk, and find out what the fees will be on any investment product, as it's easy to forget the impact of this on your overall returns.
But investment experts say it's better to save a little than nothing at all, and a savings plan doesn't normally require gargantuan contributions.
If it helps to teach a child the importance of saving and builds up a much-needed pot of money for their adult lives, then this year’s present could be the best you ever give.
Please remember that, as with all stock market investments, the value of your investment can go down as well as up and you may not get back the amount originally invested.
Changes in the rates of exchange may cause the value of your investment (and any income it may pay) to go down or up.
The benefit of keeping money on deposit with a bank or building society is that the capital is generally secure and readily available.
Current tax rates and relief could be changed at any time and their value will depend upon the policyholder’s circumstances.
Author: Iona Bain
Iona Bain is a young Scottish journalist who writes about personal finance matters for children and young people. She began writing Iona’s Young Money Blog in 2011, the first of its kind in the UK, after taking an intense interest in the financial issues affecting the younger generation, particularly since the recession took hold. Iona now writes for We Know Money, a new collection of websites being developed by moneysupermarket.com. She has previously been published in The Herald and Daily Telegraph.