Martin Lewis discusses Premium Bonds
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While the cost of living bites, many may be looking to gift their loved ones money this Christmas. Giving a financial gift may seem relatively straightforward, particularly if it is cash, however, choosing an option that is also tax-efficient needs careful consideration.
Alice Haine, personal finance analyst at Bestinvest, commented: “As the cost of living crisis threatens household budgets up and down the country, shoring up the financial future of your children and other young family members has never felt more important.
“Financial gifts can be an attractive option for parents and grandparents that want family members to have the same opportunities they did, particularly when you consider the mountain of money challenges facing young people right now.”
From the high costs of university education to the huge deposits that first-time buyers need to secure a home and rapidly rising living costs, young people increasingly need a helping hand to get by.
But, Ms Haine continued: “At a time when everyone is contending with high inflation, rising interest rates, diminishing tax allowances and a recession, passing money onto the next generation should never be done at the expense of your own financial security.
“The last thing parents or grandparents should do is leave themselves short or trigger an unnecessary and unexpected tax bill that will potentially fall on the beneficiary.”
One tax-free gift children can benefit from for years to come are cash ISAs, and the Bestinvest expert explains why.
Junior and Lifetime ISAs
While savings accounts are ideal for teaching young children about money, for bigger financial goals that require larger sums, like a gap year or a car, a Junior ISA is a better option, Ms Haine explained.
Junior Individual Savings Accounts (JISAs) are tax-free accounts to enable investments or savings to be built up for a child.
Ms Haine said: “While inheritance tax (IHT) rules apply on the amounts donated, up to £9,000 can be saved into a JISA every tax year – with all returns free from tax – allowing parents and grandparents to potentially club together and contribute without the restrictions on the interest that can be applied that come with a savings account.”
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A child cannot manage the money in the account until they turn 16 and will not be able to access it until they are 18, however, this could make for a good restriction for those that want to safeguard the money and accrue a larger pot.
Ms Haine said: “At 18, the JISA can be converted into an adult ISA, allowing the child to access a pot of investments or cash they can put towards a car, university costs, a house deposit or leave invested until the right time comes to access the funds.”
However, Ms Haine noted that while many parents chose cash savings for their children’s JISAs, this may not be the best use of a long-term allowance as “returns will be negative in real terms after inflation and the child is unlikely to need a JISA to save tax on interest”.
She said: “If you are prepared to put money aside for a child for a medium to longer-term period, such as five years or more, then a Junior ISA can be used for making investments in the financial markets, with money held over the long-term benefitting from a compounded return that has the potential to beat inflation.
“A child receiving just £50 a month in an investment JISA that earned five percent per year over 18 years would have a pot at the end worth £17,333, from a total contribution of £10,800 – an investment gain of £6,533 without factoring in any charges.”
For adult children, gift-givers can opt for an ISA or Lifetime ISA instead. Just like JISAs, Adult ISAs can be invested either in stocks and shares or cash, with any gains or income free from capital gains tax and income tax – and there are no restrictions on when they can be accessed.
Ms Haine said: “For a house deposit, contributing towards a Lifetime ISA is more beneficial, as savers aged between 18 and 39 can contribute up to £4,000 a year into an investment or cash LISA, and the Government will top it up by 25 percent. That’s up to £1,000 of ‘free cash’ a year.”
However, she continued: “There is one condition. The pot must go towards either the purchase of your first property (capped at £450,000 in value) or be held until you are at least 60. Withdrawals before 60, other than for a first property purchase, will be subject to a 25 percent penalty as the state top-ups are clawed back.
“LISAs are great for long-term saving for those between the ages of 18 and 39, however, they can continue to pay in and still receive the state top-up until they are 50.”
The gift-giver is able to contribute up to £20,000 per tax year, although Ms Haine warns to keep note of the risks around IHT, as certain sums may end up costing more depending on how soon the giver dies.
According to Ms Haine, the inheritance tax rules to keep an eye on include:
- Up to £3,000 can be given away every year tax-free. This allowance can be carried forward for one tax year, which means up to £6,000 can potentially be gifted in a lump sum free from future IHT liabilities.
- The small gift allowance means multiple cash sums of up to £250 per recipient can be given without affecting an IHT liability.
- People can also give money away that comes out of their regular income – but it must be proven that the regular payment does not affect the giver’s standard of living.
An alternative option to opening up an ISA could be to go down the more traditional route of gifting premium bonds instead.
NS&I Premium Bonds
National Savings & Investments (NS&I) Premium bonds have been around for almost 70 years with many considering them the safest way to save money because they are 100 percent backed by HM Treasury.
The interest received on the holding is decided by a monthly prize draw, and NS&I has recently increased the number of Premium Bond prizes it pays out every month, effectively boosting the prize fund rate from 1.4 percent to 2.2 percent.
Ms Haine said: “While this sounds competitive, the rate is less than the top easy access savings rates available right now, plus this is not a guaranteed return as you need to win to gain, with many not receiving any prizes at all over a 12-month period, unlike bank interest which is guaranteed.”
The good news, Ms Haine continued, is: “Parents and relatives can buy up to £50,000 in premium bonds for a child aged under 16, with all the prizes, including the top award of £1million each month, totally tax-free.
“However, unless someone wins big, they will lose value in terms of purchasing power once you factor in inflation. People giving a financial gift like this might also want to consider the implications if a child does win big.
“If there is more than one child in the family, it might not seem fair if one child suddenly has a huge pot of cash and the others don’t.”
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