A Guide to Saving For Your Grandchildren
What You Need to Know
- More and more Grandparents are looking to put money aside for the Grandchildren’s future, and there are a range of financial products available to them.
- A regular Children’s Saving Account offers a flexible and easily accessible option, and Grandparents can open them and make deposits directly.
- A Junior ISA offers a tax free savings option, and the choice between a cash or stocks and shares Junior ISA, but there is a relatively low upper limit on how much can be saved.
- The NS&I offers a Children’s Bond, which pays a good interest rate, but locks money away for 5 years.
- Grandparents can also buy Premium Bonds in the name of their Grandchildren, giving them the chance to enter a monthly draw to win between £25 and £1 million.
- A long term option is a Stakeholder Pension, which the child will take control of at 18, but won’t be able to access until they are 55.
It is increasingly becoming the norm these days that Grandparents are starting to save money for their Grandchildren. With job markets becoming increasingly competitive, and the housing ladder ever harder to get your first foot on, the challenges faced by tomorrow’s generation could be even harder than we can envisage. So any financial support they might have in place to help them is sure to be greatly appreciated.
Recent figures from J.P. Morgan Asset Management suggest that as much as £2.4 billion a year is currently being saved by Grandparents for their Grandchildren. 42% of Grandparents asked said they were saving something, and this does not include any money being contributed towards the costs of raising their Grandchildren now. Saving even a small amount on a regular basis can add up to a useful sum of money by the time your Grandchildren come of age.
With this trend on the increase, an increasing number of Grandparents are trying to figure out what the option is to put some money aside for the Grandchildren’s future. There are plenty of options on offer, all with differing advantages and disadvantages. In this guide we highlight the most popular options currently available:
Child Saving Account:
A Child Savings Account works in exactly the same way as any other regular savings account. Money can be put into the account as frequently or infrequently as you like, and in most cases it can also be taken out as and when required as well.
Most accounts can be opened with a small initial deposit, as low as £1 in many instances, but most will have an upper limit on how much can be kept in them.
Any Grandparent is able to open a Child Saving Account for their Grandchild provided they use the child’s name and are able to take along the necessary documentation, such as the child’s birth certificate.
If you are likely to be saving sizable sums in a Child Savings Account you will want to give some thought to tax as well.
If the interest the child is earning on the money saved by a parent or step-parent is more than £100, they will be liable to pay tax on it, even if the child has not exceeded the income tax personal allowance limit.
However, this rule does not apply to money given by a Grandparent. As long as the child earns less than the income tax personal allowance, a Grandparent can complete an R85 form, which will ensure that any interest is paid into the account without tax being automatically deducted.
The only tax money given by a Grandparent might be liable to is inheritance tax, if the Grandparent giving the money dies within seven years of the gift. Even then the threshold is so high it is unlikely to affect most families.
Unlike a Child Savings Account, a Junior ISA cannot be opened by a Grandparent, but must instead be started by a parent, or person with parental responsibility. But Grandparents are still allowed to contribute to Junior ISAs, which currently have a limit of £4,080 per year.
As with regular ISAs, there are two types of Junior ISAs that you can choose from:
- A Cash Junior ISA – These hold cash like a regular bank account and pay a fixed interest rate each year. This interest is tax free.
- A Stocks and Shares Junior ISA – These invest the money deposited in stocks and shares and rather than paying interest, will accrue capital gains and/or dividends.
The money kept in a Junior ISA cannot be accessed until a child turns 18, at which point they take control of the funds. Some Grandparents will see this as a risk, because there is nothing to stop the child doing what they want to with the money at that point, and most Grandparents will want the money to be invested sensibly for their Grandchildren’s future rather than blown on parties and holidays.
The advantage of a Junior ISA is that all the money saved is tax free, and obviously no-one wants to be giving any more money to the tax man than they need to. But in reality, very few children receive enough money to be liable for tax, and so for most people this advantage is relatively unnecessary.
Junior ISAs do however generally speaking offer a better interest rate than a regular Child Saving account, although they do also have a lower limit on the amount that can be saved.
A more recent addition to the ISA family is the Help-to-Buy ISA. This is a tax free account specially devised to help people save towards a deposit for their first home.
They were announced by the Government in the March 2015 Budget and are expected to become available from autumn 2015.
Up to £200 a month can be saved in them, and the Government has pledged to top up this amount by 25%, meaning each £200 deposit will receive an extra £50 from the State. There is a cap of £3,000 on the amount they will give you though.
Nevertheless, Help-to-Buy ISA’s look like offered an excellent, tax-free option for Grandparents to help save from what is likely to be their Grandchild’s single biggest life expense, the deposit for their first home.
Children’s Bond are offered by National Savings and Investment, the Government-run savings bank. They are tax free, and can only be bought for a child by a parent, guardian, or Grandparent. They must however be managed by the Parent.
A Children’s Bond is a five year investment that earns interest annually, and will also pay out a bonus at the end of the five year term. They are a long term investment, and once the money is put into a Children’s Bond it is locked in for the five year period, unless you are willing to pay a fee to get it out.
If you think access to the money might be needed in less than five years, they are therefore not a good option, but as a long-term tax free investment, they offer a good option. They currently offer an annual interest rate of 2.5%, which is competitive in the savings market. It is however fixed at this rate for the full five year period, and with interest rates expected to go up soon, may not be the best long term investment at this point in time. There is however the added bonus if you don’t touch the money for the full term to consider as well.
There is a minimum investment amount of £25 to purchase a Children’s Bond, and the child will gain access to the money when they reach 16 years of age.
If you are interested in buying a Children’s Bond, you can make an application online, by phone on 0500 500 000, or via post to National Savings and Investment, Glasgow. G58 1SB.
Another option offered by National Savings and Investment is Premium Bonds. Premium Bonds do not pay an interest rate as such, but are instead entered into a prize draw each month.
Prizes in this draw range from £25 up to the two top prizes of £1 million. All prizes are also tax free and there is a 26,000 to 1 chance of each £1 bond winning a prize each month. This sounds like big odds, but it is estimated that the average premium bond will earn the equivalent of an interest rate of around 1.35% each year.
There is a minimum investment in Premium Bonds of £100 and a maximum holding of £50,000. Grandparents are allowed to buy Premium Bonds in the name of their Grandchildren, but as with the Children’s Bonds, they must be managed by a parent, or person with parental responsibility until the child reaches 16 years of age.
Premium Bonds can be bought online, over the phone on 0500 500 000, or via post to National Savings and Investment, Glasgow. G58 1SB.
If you are a real long-term thinker, then paying into a Stakeholder Pension might be an option worth considering.
Grandparents are able to make investments in the name of a Grandchild, and up to £2,880 a year. The child will take control of the pension when they reach the age of 18, but would not be able to access the money until they are 55 years old.
These investments will also benefit from tax relief meaning that the Government will top this up to £3,660. BestInvest, a financial planner, has done some sums on these figures and worked out that an annual gift of £3,600 for the first five years could grow to £1,069,795 by the time the child reaches 55, assuming 8pc annual growth net of all charges.
This option may not appeal to all, as most Grandparents are saving to help their Grandchildren with some of life’s big costs, most of which we encounter long before the age of 55, but for those with extra money to invest it is an attractive option.
Many of the options outlined above take tax into consideration, or are tax free options. The main tax likely to be applied to gifts from Grandparents to Grandchildren is Inheritance Tax, so it is important to understand how this works.
All gifts from Grandparents to Grandchildren are exempt from Inheritance Tax if they are less than £250 a year, less than the £3,000 overall annual allowance, or a gift using the ‘surplus income’ exemption, which requires you to be able to demonstrate that they money has been made out of surplus income - either earned income or investment income - and that giving it away does not demonstrably reduce your standard of living.
Grandchildren can also be required to pay income tax if they are in receipt of money in excess of the Income Tax Personal Allowance, which is currently £10,600 a year. However making use of the tax free savings options listed above should mitigate any risk of them having to pay this.
- Take a look at our Guide to Junior ISAs for more details on this great tax-free saving option.
- The UK Net Guide offers a range of Savings Guides covering a whole host of different savings options.
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