With the unsteady financial future many face now, grandparents are looking to help the next generation along. Samantha Laurie talks to Sarah Coles and Patrick Connolly for some advice on how to save money for your grandchildren's future.
She might struggle to understand their music and gadgetry – and oh my goodness, those clothes! – but my children’s much-loved nana is their biggest fan. Aware that their generation is unlikely to enjoy the same homeowning, job-secure, pension-clad financial existence as her own, she’s keen to help them build a nest egg. But where to start? A junior ISA? Unit trust? Perhaps even a pension...
When our first stop – the bank – yields little more than a low-interest saver, it’s time for some expert tips from Sarah Coles of wealth manager, Hargreaves Lansdown and Patrick Connolly of independent financial advisor, Chase de Vere...
Samantha Laurie's son, Kit, sat with his grandmother
1. Junior ISA For under 18s, this is a simple, tax-efficient way of putting aside up to £4,260 a year. Most are cash ISAs, but there are a few in stocks and shares. The downside is that, at age 18, the child can access the money and spend it however he or she likes. Vodka and festival tickets might not be your idea of a good investment!Sarah: If you are putting money aside for up to 18 years, cash can be a dreadful choice. Consider a stocks and shares Junior ISA, which has far more potential for growth over the long term.
2. Lifetime ISA (LISA) Designed to help young people save for their own home or retirement, this works as a tax-free wrapper around savings (up to £4,000 a year), with the government providing a generous 25% top-up (bringing the total to £5,000). It’s a great way of helping older grandchildren save for a first home (you have to be 18-39 to take out a LISA) and its restrictions mean that it can only be used for purposes of which you are likely to approve. Patrick: Very popular with younger generations struggling to get onto the property ladder.
3. NS&I Premium Bonds Essentially a savings account which pays out its interest (1.4%) as a monthly prize draw. The more you put in (up to £50,000), the more you’re likely to hit the jackpot (two £1m draws a month). But you might win nothing – it’s all down to luck. On the plus side, you can take your money out any time.
Patrick: Premium bonds offer capital security, but they are unlikely to provide the best returns over the longer term.
4. Pension contributions Anyone – even a child – can pay up to £2,800 per annum into a pension, even if they have no earnings. Tax relief is added at contribution. So, if you pay the full amount, that’s a total of £3,600 which, if it continues to grow at a steady rate, will provide a pretty firm foundation for your grandchild’s pension.
Patrick: Rarely the first choice, as grandchildren will not be able to access their pension savings until age 57 (or later). In most cases, therefore, the practical purpose for saving on behalf of children – to help them make a start in life, pay education fees or put down a mortgage deposit – will not be achieved.
5. Investment funds Ideal for making regular contributions: you can put in as much as you like and take it out when needed. Moreover providers such as Hargreaves Lansdown and Fidelity are easy to use online.
Sarah: If there’s a chance that they’ll need the money before they reach 18, a good option is a bare trust like a [Hargreaves Lansdown] Junior Investment Account which lets you invest in stocks and shares on the child’s behalf. Any money put into the trust by anyone other than the child’s parents is taxed as belonging to the child – which, in most cases, means tax-free.
Patrick: For larger investments, a discretionary trust lets grandparents keep control and brings income tax benefits too. As an alternative means of retaining control, investments could be held in the grandparent’s name.
6. Bank and building society accounts Rarely the best way to save over five years or more, but they do help create good savings habits. A regular savings account which requires a minimum amount of money each month usually pays a higher rate of interest.
7. Gifts You can give each grandchild up to £3,000 a year without tax consequences, with additional allowances for birthday and Christmas and up to £2,500 as a wedding present. You can also give ‘normal gifts out of income’ – regular sums that don’t eat into your standard of living. Some use gifts to pay for their grandchildren’s school fees or to help them through university. Sums and other presents given in the seven years before you die may count as part of your estate for inheritance tax purposes, but most experts advise not to get too hung up about this.
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