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Buying Premium Bonds for children at Christmas? Check this BOOMING tax-free rival first

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Premium Bonds ‘not guaranteed return’ says expert

Investment experts say there is a better way of investing for your children. One popular type of investment has turned a £10,000 investment into £77,000 in just 10 years, and it’s all tax free.

Premium Bonds from government-backed National Savings & Investments (NS&I), are easy to gift to a child or grandchild, and could even make them a millionaire.

You can invest a minimum £25 and a maximum of £50,000, with the bonds entered into a monthly drawer where they can win prizes of between £25 and £1 million, all free of tax.

You must be at least 16 years old to buy Premium Bonds, so often people buy them on behalf of children or grandchildren.

Laura Suter, head of personal finance at AJ Bell, said winning prizes is exciting but you are trusting to luck and your chances of success are now slimmer than before.

Premium Bonds

Premium Bonds could make your child a millionaire – with a lot of luck (Image: Getty)

Suter said: “The annual prize rate, which is what the average bond holder receives each year, has been slashed continually and now stands at just one percent a year.”

At that rate of return, £1,000 of Premium Bonds would have grown to just £1,196 after 18 years, although of course you could get lucky.

Suter said that a rival tax-free investment called a Junior stocks and shares Isa will deliver a superior return in most cases.

Family and friends can gift up to £9,000 into a junior Isa this year, on behalf of a child. 

You can invest either in cash or stocks and shares, and all returns roll up free of tax and belong to them when they turn 18. 

At that point, the Junior can be converted into an adult Isa and remain free of all income tax and capital gains tax.

Anybody who invested £9,000 every year for 18 years would hand their child £265,851 on their 18th birthday, if invested in a Junior stocks and shares Isa that grew at an average rate of 5 per cent a year.

Even much smaller amounts can grow to something sizeable over 18 years but Suter said resist the temptation to put the money in a Junior cash Isa.

Today’s top Junior cash Isa rate is Loughborough Building Society’s 2.5 percent, Suter said. “That’s a variable rate and could well fall, leaving you with the hassle of switching or leaving your money earning minimal interest.”

If you saved £50 a month and the rate dropped to 0.5 percent after two years, the child would end up with £11,367 by age 18.

However, invested in the stock market and generating 5 percent growth a year, it would be worth £17,723.

That’s money that could go towards education fees, a first car, or even saving towards a property deposit.

READ MORE: Take care when gifting money to family – 5 mistakes to avoid

Yet Suter said that seven out of 10 Junior Isas are cash accounts, rather than stocks and shares. “While it might feel a bit more complicated or risky now, your child may well thank you in the future.”

You can take out with a ready-made junior Isa from online platforms such as AJ Bell Youinvest, Bestinvest, Fidelity, Hargreaves Lansdown, Interactive Investor, and Vanguard LifeStrategy.

Suter suggests three funds. “Fidelity Index World is a low-cost passive fund that tracks the global stock market and gives exposure to loads of companies around the world, with low charges.”

If you want a green investment for your child’s future, she tips Liontrust Sustainable Future Global Growth, which targets companies driving sustainable growth.

Her final suggestion is the highly successful Scottish Mortgage Investment Trust that invests in trends of the future such as electric vehicles or genomics.

DON’T MISS:
Premium Bonds: The four things you should know before investing [GUIDE]
Premium Bonds £1m jackpot HALVES in value – should you abandon NS&I? [WARNING]
Costly mistakes on Junior Isa and child trust funds [REVEAL]

Watch

With a Junior Isa, children can watch their money grow over time (Image: Getty)

Many Junior Isa platforms offer investment trusts, which have a strong long-term track record.

If a parent or grandparent had invested a £10,000 lump sum in the average investment trust 18 years ago, it would now be worth an impressive £77,400, a return of 674 percent. That’s an average 12 percent a year. 

Investment trusts focusing on smaller companies have done the best of all, according to Annabel Brodie-Smith, communications director at the Association of Investment Companies.

“The top performing sector over the last 18 years is European Smaller Companies, with a total return of 1,050 per cent. UK and Asia Pacific smaller company trusts also did well.”

It may be more rewarding alternative to Premium Bonds in the longer run.



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