Investing for grandchildren
We’re often asked by clients to explain the options that are open to them when it comes to investing for children or grandchildren. While the choice will depend on your circumstances and priorities (and you might want to get advice from your financial adviser if you’re unsure), here’s a summary of some of the most popular.
Anyone can save in a pension for a child, it isn’t limited to parents & grandparents, aunts or uncles. Contributions can start from as little as £20 gross and choosing a pension as the savings vehicle enables the child to benefit from the government top up of 25% on up to £2,880 even where they have no earnings. Many of the major providers offer a Stakeholder Pension for children, at the simplest end of the spectrum. While for more the more seasoned investor a Junior SIPP (Self-Invested Personal Pension) might be an option. A pension is a long-term savings vehicle which means the benefits of compound interest have greater impact. Pension savings do have the restriction that the child won’t be able to access the funds until at least age 55. As such, saving in a pension might not be suitable if you think the funds will be needed sooner – for the purchase of a car or university fees for example.
Child Trust Funds (CTFs) & Junior ISAs
CTFs applied to children born between September 1, 2002 and January 2, 2011. They worked in the form of an initial £250 voucher, which was given to parents to use to open an account, if they didn’t do so, an account was automatically created for them. CTFs were superceded by Junior ISAs in 2011 and can be converted into the replacement Junior ISA as the two can’t be held simultaneously. Both are tax-free with the same annual allowance of £4,260 in 2018/19. Junior ISAs can be opened by a parent or guardian with other people able to contribute to the account. The child can take over managing the account at age 16, but the funds cannot be accessed until age 18.
These are a very simple trust where the trustee makes a gift which is held for a specified beneficiary. They can be opened and managed directly by anyone. The beneficiary becomes entitled to the money at 18, but up until that point the trustee can manage the investments held within it, including withdrawing money – as long as it is to the benefit of the beneficiary, such as to pay school fees. This affords a little more flexibility than Junior ISAs. Bare trusts have no limits to the amount that can be paid in which means they are often used as a means to manage inheritance tax (IHT) liabilities. There are a myriad of different kinds of trusts and ways of using them, most too lengthy to explain in this article, but if you want to find out more about them please contact us.
Using your own ISA
Eighteen is still a young age at which to make sensible financial choices (especially if the sums involved are very large). If you’d rather keep control of the funds you could always earmark funds within your own ISA for children or grandchildren. The £20,000 annual contribution limit is fairly generous and allows for a significant fund to be built up tax-free. But, others might be reluctant to add to the pot if someone other than the child is fully in control of it. What’s more you can’t give the money to the child within an ISA wrapper so the money must be withdrawn and gifted.
Making gifts of cash whether regularly or as a one-off investment can have tax implications. In some cases regular gifts of income can reduce inheritance tax liability (read our article Managing Inheritance Tax for more information), but there may be implications for Capital Gains Tax and Income Tax for the donor and the recipient. It’s worth bearing these complexities in mind before deciding on a course of action. If the sums you’re thinking of saving are significant or your financial affairs are not straightforward you should consider seeking the help of a financial adviser.
The Financial Conduct Authority does not regulate tax advice.
Stakeholder pensions for children, Legal & General
Saving in a pension for grandchildren, Saga