A Guide to Saving For Your Grandchildren
What You Need to Know
- Children cannot be taxed for interest earned in accounts funded by their grandparents, meaning you don’t have to worry about your investments contributing to their personal allowance.
- If your grandchild has a Child Trust Fund, the government advises you to choose a “stakeholder” account, as these traditionally end up being worth more than investments made in savings accounts. See the ‘Child Trust Fund’ section for details.
- When choosing a savings account bear in mind that you can earn a higher interest rate by opening a “bond” and not touching the money for a fixed period of time. See the ‘Saving Accounts’ section for more details.
- If you want your grandchild to have access to funds before they reach 18 you can allow them to get money from your savings account using a cashcard or passbook.
- If you want to make the most of the profitability of shares based investments but are worried about the risk, ‘pooled accounts’ offer safety in numbers. See the ‘Shares Based Investments’ section for details.
- If you choose to invest in premium bonds remember that any prizes won will go to the parents, who will control the bonds until the child is 16, regardless of who paid for them. See the ‘Risk Free Options’ section for details.
- If you are looking to secure the long term future of you grandchild it is possible to set up a stakeholder pension for them, helping them to live comfortably when they reach 55.
Growing up never gets any easier and, whilst the future is impossible to predict, one thing is certain; your grandchild will appreciate all the financial support you can give them when the time comes.
Scottish Friendly have a Grandchild Flexible Investment Plan that you invest for a maximum 18 years but flexibility is built in so there is the option for your grandchild to take the money out earlier if they need to.
Whether they’ll need a bit of capital to purchase their first car, make a deposit on a flat or meet the costs of further education, there’s a wide range of ways you can start saving towards your grandchild’s future. Here is our guide on the most important things you’ll need to know to pick the best investment for you;
As with adults, children are eligible to start paying tax once their income crosses the threshold of the personal allowance (£7,475 for the 2011/2012 tax year.) Children are also subject to taxes similar to capital gains tax, and if they earn more than £100 a year through interest in accounts funded by their parents, they will face deductions.
This is where being a grandparent really helps you to make the most of the money you’re setting aside, as the interest earned from accounts funded by grandparents is exempt from such tax!
Inheritance tax on financial gifts can also be avoided in many instances. For example, you are entitled to an annual allowance, a small gits allowance and can give away as much of your after tax income as you like (as long as it fits in with your regular spending patterns) in the event that you pass away. Control of many accounts you might set up as a gift pass automatically to the beneficiary at a certain age or anyone else you designate in these circumstances, should you no longer be around.
Child Trust Funds
These types of government run funds have, unfortunately, been discontinued. However, if your grandchild was born between September 1st 2002 and 2nd January 2011 they should, automatically have had one set up.
The fund is a government assured, tax free saving account. The account is long term and the money cannot be touched until the child’s 18th birthday, at which point they take control of it (although the money technically belongs to the child from the start of the fund.)
The fund is invested in by the state, who’ll pay in a voucher, worth between £50 and £250 when the child is born, and can be further increased by payments of up to £1,200 a year by family and friends. It is important you co-ordinate when paying in, as you’ll incur penalties for going over this amount.
There are three main types of CTF account; ‘stakeholer’,’share’ and ‘savings.’ The ‘savings’ option works like a bank account. It’s secure and will earn interest. Both ‘stakeholder’ and ‘share’ options have risk attached as they involve the fund’s money being invested in shares and bonds, the value of which can go down as well as up.
However, they are recommended by the government, who take many steps to reduce the risk involved and believe they are generally the best option. With the ‘stakeholder’ option for example the money has to be used to invest in a variety of companies, thus spreading risk. Furthermore, the account automatically moves the funds into lower risk options once the child reaches 13. As the fund is very long term, the value of ‘share’ and ‘stakeholder’ options, which are flexible in their performance and not dependent on interest rates, tends to be higher than savings accounts.
Since the phasing out of CTFs, the government has announced the launch of Junior Isas, a new type of saving scheme, whereby money can be paid into an account, earning tax free interest on the behalf of the child.
These accounts will be available form November 2011 and will work in a very similar way as CTFs in that the money paid into them is ‘locked’ away and cannot be touched until the child reaches 18, at which point they take control of the Isa.
One major difference is that, unlike a CTF, the government do not pay into the account at any stage, however, the limit that you can pay in is much higher, allowing you to shield more of the money you’re setting aside from being taxed. Whereas you can only pay £1,200 a year into a CTF, you can invest as much as £3,000 into a Junior Isa every 12 months and, as some providers are offering up to 5% interest, after 18 years your grandchild could be looking at a considerable some of money.
As with a CTF you can choose between a safe cash option, or have the savings in stocks shares, which may benefit from the long term performance of the stock market(this is called an Investment Junior Isa.) Providers of junior Isas include high-street banks and building societies.
To be eligible the child must have been born after the 3rd of January 2011 or before September 2008 and must be under 18. If they have a CTF, they are not eligible.
If your grandchild isn’t eligible for a CTF or Junior Isa, or even if they are, you may want to open a savings account on their behalf. Many savings accounts marketed at children offer flashy incentives such as toys etc, but remember to focus on the account itself when shopping around.
As with normal accounts, you are normally able to set the restrictions on the account, such as accessibility, fixed or variable rates and whether you pay in regular instalments or lump sums, however, unlike with an average account, having more restrictions in place my play in your favour.
For example opening a ‘bond’ (an agreement where by your money is locked away in the account for a fixed period) would, despite paying a higher rate of interest, normally be an inconvenience, as you wouldn’t be able to get to your money. However, this may be just what you need, if you wish for the money to be unreachable (as it would be with a CTF) until the child hits a certain age. It’s best to shop around in order to asses the best high interest bond options for you.
This option is secure as, unless inflation rises faster than the interest rate, there is no way your investment can lose value. However, this option often proves expensive in terms of opportunity cost. Whilst it sits in the account you can’t do anything else with it. That includes investing in profitable stocks and shares.
A major advantage is that you can control access to the account. Unlike a CTF, you can choose to let the child get at the money with a passbook or cash card, but you can also make the money inaccessible to them if you desire. If you open the account in their name the interest is not susceptible to tax and, if you want the gift to be a surprise, you can open it without their knowledge.
Share Based Investments
Many people hear the words “stocks and shares” and associate them with Monte Carlo style financial risk taking. This is not really the case as, especially when saving for your grandchild, you’re looking at an extremely long term affair. Remember, historically, shared based savings have consistently outperformed interest based ones.
For one thing this is because the period of time reduces the risk. Poor performances one can be made up for over time. There are also other ways to reduce the risk, such as “pooled accounts” where a group of people invest and the account manager uses the bigger pot of capital to spread risk across various investments.
Alternatively, taking the account manager out of the picture can also reduce risk. Instead you can use a ‘passive’ tracker account, which will always stick with the biggest companies in the market.
Children cannot own shares until they’re 18, so cannot receive the money until then, if you designate them as the beneficiary of the account it will pass to them on their 18th birthday.
Always remember that risk is involved and that you can lose some or even all of the money you put up and you will normally be committed to investing a certain amount over a certain period.
Risk Free Choices
If you’d prefer not to put your investment at risk there are a number of other great options. National Savings’ Children’s Bonus Bonds, for instance are 100% assured by the government and are tax free. You can invest £3,000 per an issue, interest is added every year and there are guaranteed bonuses every five years until the child reaches 21.
Whilst the money is owned by the child the bonds are controlled by the parents until the child is 16, no matter whether it was you, or anyone else, who bought them. As the parents control the bonds this also means they could cash them in at any time, this is worth considering if, for any reason, you feel uncomfortable with the parents having more control over the money than you or your grandchild.
Grandparents can also buy premium bonds for their grandchildren. These work in a similar way except that, rather than earning interest, they are entered into a monthly prize draw. Whilst the prizes are tax free, they go straight to the parents, who control the bonds, until the child is 16.
Thinking Even Further Ahead
Pensions are a big worry these days. Whilst most grandparents are concerned with helping their grandkids come of age, not many think about helping them retire. You can, however, set up a stakeholder pension for your grandchild as soon as they’re born. In this case the money you invest will grow for as much as fifty years, untouched by your grandchild until they’re 55. There are even government tax reliefs towards your contributions.
Obviously, looking for far ahead has many problems. Pension rules may change and, whilst you can be fairly sure your grandchild will need some financial help in their early adulthood, by 55 they may not need any help, or have found its come too late. All told, there is a reason that this is not a popular option.
- Read our guide to Junior ISAs for more tips on this great method of saving.
- This guide to saving for children contains a number of great tips.
- If you want to provide some level of support for you grandchildren right up to retirement, read our guide to private pensions.
- If you're interested in building a nest egg via stock market investments, read our guide to buying and selling shares online.
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