Recent rule changes make it possible for anyone to gift Premium Bonds to a child under 16. Aunts, uncles and family friends can now get in on the act as previous rules restricting who could buy bonds for children have been relaxed.
If you’re looking to help create a nest egg for a child, Premium Bonds may look attractive at first glance, but are they a good choice?
What is a Premium Bond?
A Premium Bond is an investment product available from National Savings and Investment (NS&I). Rather than earning interest or receiving a regular dividend, with a Premium Bond you are entered into a monthly prize draw with a chance to win between £25 and £1 million tax-free.
The minimum amount that can be invested is £25 – following a reduction from £100 back in 2018 – making it an affordable gifting option for extended family and friends. And because NS&I are Treasury-backed, money invested into a Premium Bond is 100% secure.
But, with no interest paid, the money you’re investing is not earning interest. This means that you could potentially see no return on your investment. If you don’t win, or win only a small amount, your investment might not keep pace with the cost of living and could amount to a loss in real terms.
- Your money is safe. NS&I are Treasury-backed and the prospect of knowing your money is secure is a definite draw.
- Minimum investment amounts are low. With a minimum investment of £25, Premium Bonds are affordable for grandparents and extended family. (This is Money report that the recent decrease in the minimum investment amount has led to a massive boost in the number of under-16s holding the bonds.)
- Your money is easily accessible – it can be withdrawn at any time, hassle-free, simply by contacting NS&I by telephone or via the web.
- The prize draws. Finally, of course, there’s the chance to win. The cash prizes range from £25 to £1 million and all winnings are paid tax-free. Plus, the more you invest the higher your chance of winning (the maximum you can invest is £50,000), as each £1 investment gives you a unique entry into the draw.
- The absence of interest. The main drawback is that your money is not earning interest. This leaves you with the chance of seeing no return on your investment. Once inflation is factored in, this could amount to a loss in real terms.
- Returns left to chance. The only way your money earns anything is if you win in the monthly draw and that is far from guaranteed – the odds of winning according to the NS&I website are 24,500 to 1 for each £1 bond number.
- The available alternatives. When weighed against the other investment vehicles out there, and barring a big payout, returns may well be better elsewhere.
What are the alternatives?
1. Junior ISAs
Junior ISAs (JISAs) are open to anyone under age 18. If you’re looking to provide a child or grandchild with the deposit for their first home, or some help towards university tuition fees, a JISA might be a good choice.
Like an adult ISA, any returns on the investment are tax-free, so no Income Tax or Capital Gains Tax will be paid on any profit that’s made.
For the 2019/20 tax year, you can invest up to £4,368 into a JISA and when your child reaches 18 the investment will roll over into an adult ISA. From this point, your child gains control of the account. They can remain invested (and become subject to the increased adult ISA allowance) or else withdraw.
2. Savings accounts
Setting up a bank or building society account for your child or grandchild is a great way to start building for their future. Getting into the saving habit, and learning to manage their own money, are both good lessons for children to learn.
A child savings accounts can be set up for anyone under the age of 18, with an initial outlay from as little as £1, and your child can begin to manage their own account as early as age 7. Depending on the type of account you open, money may be available to withdraw immediately.
If you’re looking for a long-term investment – and longer-term control of your child’s finances – other options might better suit this purpose. But to get children used to dealing with banks, and depositing and withdrawing their own money, a savings account is a great option.
3. A pension
Investing in a pension is a great way to save for a child’s long-term future. Pensions are tax-efficient and can introduce children to the concept of long-term saving, leading to potentially significant retirement income when your child reaches retirement.
The pension allowance for a child is £2,880 for the 2019/20 tax year. This amount can be paid in annually and attracts tax relief, effectively uplifting your investment to £3,600 per year.
The current minimum retirement age is 55 (and this may rise in the future). Benefits can only be taken at retirement, so this is a long-term investment with money potentially tied up for the next 50 years or more. The returns, though, could make it worthwhile.
Although affordable, and undoubtedly eye-catching – certainly where the £1 million tax-free prize draw is concerned – there might be better investment options on the market.
Whether you’re looking to introduce your child to the concept of saving, building up a deposit for a first house, or starting planning for their retirement, there are investment products to match your purpose. Knowing what your ultimate aim is will help you find the best product for you and your child.
Get in touch
If you’d like to discuss investment options for your child, please get in touch. Please email email@example.com or call 0115 933 8433.
Please note: The value of your investment (and the 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. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.