Long-term investing is a shrewd part of any financial strategy, but it can be particularly effective if you have time on your side. If you’re saving on behalf of a grandchild, you may find that even small sums can build into a helpful future nest egg. Stuart McCulloch, Market Head of The Fry Group Middle East office, looks at what’s possible if you are keen to bank some savings on behalf of your grandchildren.
When it comes to saving for grandchildren there are a number of good tools which can help to make the process easy and tax-efficient.
Bank and savings accounts
With interest rates on the rise, there are lots of options to help you build funds from a small, regular sum. A wide variety of cash accounts is available, from a standard bank account to fixed rate savings options. Accounts for children usually offer some of the best rates available too. Having a long-term approach can certainly help here; if you deposit £25 into a fixed rate savings account paying 2.45% from your grandchild’s birth until they turn 18, the end result would be £6,775. The benefits of a standard bank or savings account include being able to access the funds at any point, so they can be particularly useful if you want to start saving on behalf of a teenager.
Just like their adult equivalent, Junior ISAs don’t attract Income or Capital Gains Tax and can be a useful savings option, particularly as the money is locked away until your grandchild turns 18. Although a parent or guardian needs to open the JISA, anyone can then save into it and use it (as long as you and the child in question are UK resident) up to a limit of £9,000 each tax year. There are opportunities for saving into just a cash option, opting for a stocks or shares route or combining a mixture of the two. Once your grandchild is 18 they can convert the JISA into an adult ISA, or access the funds. If your grandchild is older, aged 18 to 39, you can opt to save into a Lifetime ISA (LISA) on their behalf although they will need to open the account themselves to start things off. Again these options are relevant to those resident in the UK.
Despite unrest in recent months, using the stock markets to save for a young child can be a worthwhile option to consider. With money invested for a number of years there’s time to weather market highs and lows, with shares typically generating a better return than cash over the long term. For example since 1926 the US stock market has delivered an annualised return of about 10%. An independent adviser can help assess the best options for your particular circumstances.
Planning for the future
Whilst it can seem odd to be thinking about your grandchild’s retirement whilst they are still young, you can give them a helping hand by opening a Junior SIPP (Self-Invested Personal Pension). This tax-efficient option, once set up, allows anyone to pay into the pension up to a maximum of £3,600 a year (consisting of a £2,880 contribution, and £720 basic rate tax relief). The ‘pot’ is safely locked away, accessible only once your grandchild reaches suitable age (currently 55, rising to 57 in 2028) giving plenty of time for the funds to grow. Here compounding can be a powerful force, and saving the maximum contribution of £2,880 per year into your grandchild’s pension from birth to age 18 would give them a pot worth £1m by age 65, assuming 5% net return.
Managing your wealth
As well as helping set your grandchildren on a more stable financial course for the future, saving on their behalf can also benefit you too. For example, making gifts during your lifetime is a great way to reduce your 40% Inheritance Tax (IHT) bill. Those regular gifts out of income could be immediately exempt from a 40% Inheritance Tax charge provided various conditions are met. However, you may need to wait seven years for a one-off gift to be freed from that 40% IHT charge. So don’t forget to use your IHT allowances: GBP3,000 each year, exemptions for gifts on marriage and an exemption for small gifts of up to GBP250 a year but not to the same person.
It might also be preferable, rather than sharing your wealth through outright gifts, as mentioned above, to consider setting up a trust for your grandchildren and gifting financial amounts into this. It’s usually best to establish the trust quite early in their lives, once you’ve decided that you want to start to provide for them during your lifetime rather than as part of your estate and legacy.
To discuss a specific plan based on your own circumstances please contact your nearest office.