When it comes to securing your grandchild’s financial future, there are several savings and investment options to consider.
Junior ISAs
Your grandchild’s parent (or legal guardian) will need to open it on their behalf, but anyone can pay in up to £9,000 each year.
It’s worth mentioning that the money will be locked away until your grandchild is 18 – no one can access it, including you and your grandchild’s parents. But if you want a tax-efficient way to save money for your grandchild in their own name, a Junior ISA is definitely worth considering.
Junior pensions
This one I love, why? Because it is the start of a great long-term investment plan and will provide an excellent base for pension in retirement for your grandchildren.
You can open a Junior Self-Invested Personal Pension as soon as your grandchild is born. It grows in an income and capital gains tax-free environment and can be exempt from inheritance tax too. You can pay a maximum of £3,600 a year with the government paying £720 a year – so you contribute £2,880 and this gets uplifted by 20% tax credit taking it to £3,600.
Of course, your grandchild won’t be able to access their pension pot until they reach 57 or perhaps a little older, depending on changes to minimum retirement ages, but what a way to invest in their long-term future.
The Isa and the Pension funds would be invested, and it does therefore come with the standard risk warnings of “values” can fall as well as rise and you could get back less than invested.
Lifetime ISAs
For those older grandchildren, you might like to consider a Lifetime ISA. This is a flexible affordable way to save and invest for their first home or later life and can be opened by anyone between the ages of 18 and 39.
The funds can be invested in cash or in the stock market and once invested will grow free from UK tax but with the added benefit of a 25% government bonus worth up to £1,000 a year. The maximum investment amount is £4,000 so with the government’s bonus, £5,000 a year can be saved.
The idea is that this pot of money is used as the deposit for a property purchase, needs to be for a first-time buyer, for a maximum value of £450,000 or if not used for a property purchase, so then can be used for retirement pension funding at age 60.
You can only use the funds for the above two purposes. If you wanted to encash for any other reason, so then the bonus would be removed and there may also be a penalty for access so which could mean you would get back less than you had originally put in.
Children’s savings accounts
A children's savings account is an option for a more flexible way to save money for your grandchildren.
The money can be accessed at any time and the interest earned won’t be taxed as long as your grandchild doesn’t have an income of more than £12,570 in 2022/2023.
Note that interest rates may vary considerably over the years, and whilst reasonable at the moment, it is very possible that the interest rates available on many bank accounts and building society will be less than inflation, resulting in the spending power of the savings decreasing over time.
Gift £3,000 and reduce inheritance tax
Everyone has a £3,000 ‘annual allowance’ that they can give away to whoever they like, tax-free. This may be helpful to reduce Inheritance Tax as once gifted, this amount won’t be counted as part of your estate for inheritance tax purposes.
This article should not be construed as a personalised recommendation. The most suitable solution for you will depend on your own personal circumstances. No action should be taken without seeking further formal advice.
MHA Moore and Smalley is the trading name of Moore and Smalley LLP. Moore and Smalley LLP is regulated by the Financial Conduct Authority, FCA registration number 448716.
