The gift of grandchildren is like no other, it creates the opportunity to spoil someone very special to you. The initial impulse is to rush to the children’s shops and purchase all the toys and clothes for your grandchildren. Of course this is something grandparents want to do, and so it should be, however when the wardrobe is full and the toys are bursting out the box, what then? Have you ever thought about what your grandchildren may appreciate when they are a little bit older? Money towards their first car, a travel fund, university education! Through sensible financial investment, such wants could become a reality.
Savings for grandchildren
Indeed, there are a few ways to save and invest for grandchildren that can have a lasting effect on their later financial independence.
Nearly half the UK has bonds – they’re by far the biggest savings product with more than £49 billion held in them. Earlier this year the maximum sum any one person could invest rose from £30,000 to £40,000 and, for those who are able to buy £40,000 worth of premium bonds, you could expect to see a return of £2,500 over 10 years. Most people, however, are not likely to have a spare £40,000 in the bank. Therefore, taking a more realistic figure of £1,000, invested over 10 years, with average luck, you may expect to win roughly £100. Despite their popularity, you’re not really getting much for your money. So let’s see how this compares to other investment options, and then you can determine which is right for you.
Child Savings Accounts
For a grandparent, setting up a child savings account is very straightforward, as long as you open the account in the child’s name and have documentation, such as the child’s birth certificate. What’s more, providing the child earns less than the personal allowance for income tax, currently £9,440 (which, unless they’re a child star, they most likely will), a grandparent can fill out an R85 form to ensure that any interest is paid without tax being deducted automatically. In other words, the savings will be allowed to grow in a tax free environment. Incidentally, the same cannot necessarily be said of accounts where parents are putting money aside as these are still subject to £100 tax free income caps per parent.
As with adult savings accounts, the lengths of terms, interest rates, premiums and withdrawal restrictions will vary from account to account so it is worth shopping around for a solution that best suits you and your grandchild.
Grandparents are not able to open a Junior ISA for their grandchildren but they can make contributions (i.e., subscriptions) up to the annual limit, which stands at £3,720 for the current tax year. Unlike many child savings accounts, you do not have to commit to paying in to the fund, but if you are wanting to pay monthly this can be done easily by setting up a direct debit. Within an ISA, funds can be held in either cash and/or stocks and shares.
Any income made in a Junior ISA will be tax free, however, it is worth bearing in mind that once your money is in the ISA it belongs to your grandchild and will be locked away until they’re 18.
A stakeholder pension is a very long term investment; your grandchild takes control at 18 but cannot access the money until they reach age 55. According to financial planner BestInvest, 5 years of £3,000 investment (not including the government top up) could make your grandchild a millionaire by the time their own grandchildren come along.
Which Option Suits You?
There are pros and cons to each. There is the potential to “win big” on premium bonds, however the odds are very slim as stated above. And, unless you are lucky enough to win you will not see any return on the bonds you buy. Whether you consider it a limitation or a benefit, you can also be tied into a bond, for a period of anywhere between 1 and 5 years.
As mentioned above, not all child savings accounts are directly comparable because providers offer differing rates and restrictions on the accessibility of the funds (an example of a child savings account with few restrictions can be found at Jump). For example, some providers require proof that any withdrawals being made are for the benefit of the child, which is not necessarily a bad thing. However, the advantage of a child savings account is that no amount of interest earned on money you put in is subject to tax, in contrast to the limitations placed on parent contributions.
Many consider that a selling point of Junior ISAs is that the money therein cannot be accessed until the child turns 18, preventing parents from dipping in to it (which may be possible with a savings account) and ensuring that the child receives the full proceeds. With that, though, comes the consideration that you would not be able to access the money, if you or the child’s parents were in financial difficulty. It is also worth bearing in mind that a stocks and shares Junior ISA has the potential to generate greater returns over the long term than cash savings accounts, but may carry greater risk.
The return on a stakeholder pension is fantastic, however your grandchildren will not get to benefit from that money until they are in their mid-fifties. And, let’s be honest, we want to see our grandchildren making the most of their money!
There is much to consider, each option brings merits and limitations, and it is about finding which is right for the investment you want to make.
Savings for grandchildren is a Featured post