How canny investment could be the best present for a child this Christmas: Sarah Coles

I refuse to be upbeat about it: does she have any idea how aging it is to be a great aunt?

However, as I filled my basket with over-priced baby tat to give her on the day, it occurred to me that there was something far more useful I could give this kid – something that anyone buying for children could give some serious thought to this Christmas: money.

Traditionally it’s is thought of as the go-to gift of the grandparent (or great aunt) who doesn’t have the time or energy to think of something the child would actually like, but there are all sorts of reasons why it’s the best possible present.

If you just hand over the cash, then at the very least you’re giving the most efficient gift possible.

If you spent £10 on something they didn’t particularly want, they might put a value of £6 on it: at least that crisp tenner will be appreciated for every penny.

But there are other financial gifts that offer even more.

You can put money direct into their savings account.

This gives them the chance to make early decisions about spending and saving.

If they choose to spend, they’ll get something they want; if they buy something that turns out to be a mistake, they’ll learn the dangers of impulse shopping; and if they leave the money where it is, you’ll have helped them appreciate the value of saving.

The rates on children’s accounts tend to be better than those on their adult counterparts, so at the moment they can make 3.5 per cent on an easy access account (HSBC).

You might need to ask their parents if they have an account, or if they’re prepared to open one.

It’s also worth highlighting that even these higher rates aren’t keeping pace with inflation, so it makes sense more for short-term savings that you expect them to need in the next five years.

Alternatively, you could buy them Premium Bonds.

It has long been a favourite among grandparents, because it’s the only product which gives them the chance to win a life-changing pot of cash – or their money back.

It’s easy to see why this has becomes the UK’s favourite savings product, but it’s worth knowing the price you pay for putting your money in these bonds.

You don’t make any interest on them, so you’re relying on winning prizes in an effort to keep up with inflation.

In an average month, the average bond will win nothing, so you need to be particularly lucky in order to hang onto the value of your savings – and inordinately lucky to win big.

Right now, inflation is taking a real toll, but even when it’s at more typical levels, assuming they hold the bonds for the long term, you’ll need to accept that the buying power of your original lump sum will gradually dwindle away to next-to-nothing.

The third cash option is to top up a cash Junior ISA.

These are very much like children’s savings accounts, except the money is tied up until the child is 18, and all interest is tax-free.

This means it’s going to take much longer for the child to appreciate your generous gift. However, if you keep adding to it over the years, it can build up to a valuable nest egg.

The rates on these are higher than adult ISAs, so at the moment you could earn up 3.75 per cent (Skipton Building Society).

However, this is still below inflation, so over the long term it may not be the most appropriate option.

If there are 5-10 years or more until the child is 18, you could top up a stocks and shares Junior ISA instead.

These have the same tax benefits as the cash version, are still tied up to the age of 18, but they can choose to invest in a variety of stockmarket-linked investments.

If they already have one of these, you can usually top up direct online or by phone if you have the child’s full name, date of birth and account number.

Again, you’re unlikely to get an enormous amount of thanks before their 18th birthday.

However, by then the power of investment and compounding – where you get growth on your growth - means it could grow into the sort of nest egg that could make a real difference to them.

If you invested £100 in a global tracker fund when ISAs were launched in November 2011, it could be worth £367 today.

You could even consider signing up for a regular monthly investment of as little as £25 a month. If you’d done this since launch (on top of their £100 Christmas gift) their nest egg could currently be worth £6,725.

If you’re prepared to live without any gratitude, then you could play the really long game and put the money into a Junior SIPP – to make a start on their pension savings.

Money that will end up being invested for over 50 years will really exploit the power of compounding. It means it will work far harder for them than any cash they ever invest themselves.

However, you’ll need to bear in mind that they won’t be able to access this cash until they are at least 57 – even if they could really do with it earlier in life.

Plus, if I’m going to make it to my great niece’s 57th birthday I need to live to the age of 105, which realistically means I won’t be around on the day she suddenly realises what a brilliant great aunt I’ve been.

Given how unpredictable life can be, I’d personally like her to be able to access this cash in a crisis as an adult, so for me this tips the balance in favour of a stocks and shares Junior ISA top-up when she’s born.

Either that, or the kind of incredibly irritating and noisy toy that will drive her parents up the wall. It’s the least they deserve for turning me into a great aunt.

Mortgage mayhem

Figures from the Bank of England this week revealed that mortgages approved for the coming months fell 11 per cent between September and October – and were down 21 per cent from August, as mini-budget mayhem marauded through the mortgage market.

Falling demand for mortgages reflects the Zoopla findings that buyer interest also plummeted 44 per cent following Kwasi Kwarteng’s controversial announcements, which rings alarm bells for the property market.

So far, November figures show house prices levelling out, but this could be the tipping point.

It’s not all terrible news though, because predictions of house price drops over the coming year are increasingly in single figures – including the Office for Budget Responsibility at 9 per cent - reflecting optimism that rates may come down sooner rather than later and the recession may not be as long or as deep as had been feared.

Sarah Coles is a Senior Personal Finance Analyst for Hargreaves Lansdown and Podcast Host for Switch Your Money On