Ways to save for your grandchildren

Marianne Curphey

Helping your grandchild to save

Many people would love to help their grandchildren save and invest for the future, but are not sure how to go about it. Helping grandchildren to become financially secure is a wonderful and achievable goal, and there are a number of different options.

Encourage the savings habit with a deposit account

Instead of giving money for birthdays and Christmas, you could help build a nest egg for a child so that they have some funds available when they reach 18 to buy a house, go to university, or buy a car.

The simplest way is to contribute to a savings account in their name. Children have their own personal tax allowance so they shouldn’t have to pay any tax on their earnings. As they get older you can talk to them about the money they are saving in the bank and discuss how the interest is building up.

Top tips:

  • Look for a savings account that pays a good rate of interest, rather than provides gimmicks like a free piggy bank.  
  • The best place to research best buy savings rates is at Moneysupermarket.com or Moneyfacts.com which lists best buys.
  • Regular savings accounts also tend to pay better rates than no-notice savings accounts, but do have stricter rules on withdrawing money or missing regular payments so be sure to read the small print.

Contribute to a long term savings account that will grow with them

The most tax efficient means of saving for the long term is a Junior ISA. For each child you can invest up to £4,080 in a Junior ISA for the 2016-2017 tax year.

The child can get a Junior ISA if they are under 18, live in the UK, and don’t already have a Child Trust Fund. If they do, the CTF can be transferred into a Junior ISA instead.

The child’s parents need to open a Junior ISA on their behalf. Then grandparents, friends or other family members can make contributions into it.

A Junior ISA can either be cash-based (so there’s no tax to pay on the interest) or investment-based (investing in shares which means the dividend payments or growth in the fund won’t be taxed). Or it can be a combination of both.

Top tips:

  • Parents can open the account and grandparents can contribute to it
  • The money belongs to the child, who can control the account from age 16, but can’t withdraw the money until age 18.
  • By contributing small but regular amounts to a shares-based Junior ISA you can smooth out the ups and downs of the stock market and you don’t have to try to pick the right time to invest.
  • A Junior ISA runs from April 6 each year, rather than the child’s birthday year (as it is in the case of a Child Trust Fund).

Start a pension for your grandchild

It may seem a strange idea to start saving for your grandchild’s retirement when they have not yet left school, but by contributing to a pension when a child is very young there is a lot of time for the fund to grow and accumulate. At this age, even small amounts will grow over time to become a meaningful nest egg.

Each child can have their own pension. As they are not earning an income, the government automatically refunds tax on savings of up to £2,880 per year only. However, when this is grossed up with tax relief it makes it into a total contribution of £3,600 a year.

Grandparents can contribute to the child’s pension. Under the current rules, you can’t access your pension until you reach age 55.

If you were to invest £300 a month into a pension for a child until they were 18, it would cost a total of £52,000. Over the working life of the child, however, that could grow to a fund of £1 million or more.

Top tips:

  • Look for a pension which has low charges.
  • A stakeholder pension is a good option—management charges can’t be more than 1.5% of the fund’s value for the first 10 years and 1% after that
  • Check whether you can start and stop payments when you want or switch providers without being charged – stakeholder pensions allow you to do this

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