Christmas is a magical time of year, especially for young children who will be eager to see what Santa has left them under the tree. Along with their gifts, your child may receive money that could be put towards long-term goals and milestones.
It’s likely not just you who will be buying presents for your child this year. Indeed, according to a survey published in Your Money, in 2023, grandparents collectively spent £4.3 billion on younger family members – roughly £140 for each grandchild.
With your child being lucky enough to have so many treats, you might want to think longer-term when deciding how to use the money your child receives during the festive period. Rather than buying more toys, it could be used to create a nest egg that may offer them a vital head start when they reach adulthood. While it might not seem as fun as the latest gadget now, your children are likely to thank you in the future.
So, here are three ways you could use your child’s Christmas money to build a nest egg.
1. Place money in a savings account
One of the simplest steps you can take to start building a nest egg is to place financial gifts into a savings account.
The money is usually accessible, so you could use it for short-term savings goals. It could also be a valuable way to teach your child about the benefits of saving and how interest works.
While interest rates have increased over the last two years, when you’re saving for a long-term goal, inflation could still erode the value of your child’s money in real terms. As the cost of living rises, if the savings don’t grow at a faster pace, the value is falling in real terms. So, you may want to consider how and when you’d like the nest egg to be used.
If you’re saving for your child, a Junior ISA (JISA) may be an option you want to weigh up.
JISAs offer the same tax benefits as their adult counterparts – interest earned on savings isn’t liable for tax. In addition, the interest rates offered may be higher than a standard savings account.
In the 2024/25 tax year, you can add up to £9,000 to JISAs on behalf of your child. However, keep in mind that the money held in a JISA isn’t accessible until the child turns 18.
2. Invest the money to support your child’s long-term goals
If you plan to build a nest egg for long-term goals, investing might be the right option for you.
Investing on behalf of your child presents an opportunity for the money to grow at a faster pace than it would in a savings account. However, returns cannot be guaranteed and investments may experience volatility. As a result, it’s often a good idea to invest with a minimum time frame of five years.
You should also consider what level of risk is appropriate for your goals when investing. This is an area we could help you with.
Again, a JISA may be an option to consider if you want to invest your child’s money. Indeed, official statistics show almost 6 in 10 JISAs are investment accounts.
A Stocks and Shares JISA provides a way to invest tax-efficiently – investments held in a JISA are not liable for Capital Gains Tax.
3. Use the money to start a pension
It might seem strange, but starting a pension on behalf of your child before they even think about entering the workforce could be valuable.
As the money held in a pension is typically invested for decades, it has an opportunity to grow throughout their life.
Longer lives and other financial pressures mean younger generations could find it more difficult to retire comfortably. Indeed, according to a Canada Life survey, more than two-thirds of people believe retiring in your 60s will become a thing of the past.
So, while retirement might be a milestone that’s more than 50 years away for your child, contributing to their pension now could offer them more financial freedom later in life.
There isn’t a minimum age for opening a pension. Only a parent or guardian can open a pension for a child, but once it’s set up, other third parties, such as grandparents, may make contributions.
Much like an adult pension, the contributions may even benefit from tax relief which provides a further boost to the nest egg. Non-taxpayers, including children, can usually pay up to £2,880 into a pension in 2024/25 while retaining tax relief.
The key benefit to adding Christmas money to a pension is the chance it has to grow – a relatively small contribution now could grow significantly when you consider how investment returns may compound. Of course, investment returns cannot be guaranteed.
If you’re considering this option, keep in mind that your child would not be able to access the money until they reach pension age, which is 55 and rising to 57 in 2027, and could rise further in the future.
As a result, contributing to a pension for your child may be an option you want to consider after you’ve taken other steps, such as maximising their JISA allowance.
If you’d like to talk about how to set up a pension for your child or balancing investment risk, please get in touch.
Contact us to discuss how you could provide your child with financial security
If you want to provide your child with financial security and more options when they reach adulthood, there may be other steps you can take too. For example, you might want to set up regular contributions to their JISA or put money aside to support them through university.
We could help make your family’s future ambitions part of your financial plan. Please get in touch to talk about your goals and how you might reach them.
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
All contents are based on our understanding of HMRC legislation, which is subject to change.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.
