Giving grandchildren a financial head start

Gareth Shaw / 26 July 2016

Many of us want to help to build a healthy financial future for our family. The good news is that there are plenty of investment options.



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Question

I want to start saving for my three-year-old granddaughter’s future, so that she has some money that she can choose to put towards a property, university fees or pension savings. What’s the best way of going about this?

Answer

You’re one of an army of grandparents saving for their grandchildren’s future. Recent research carried out by Saga Investment Services found that one in three (38%) grandparents are contributing on average £181 per month for their grandchildren.

The reasons for this are stark – currently, a university degree costs £27,000 for tuition fees alone, while first-time buyers have to find an average deposit of £33,000 to get on the property ladder, according to Halifax. 

Meanwhile, the responsibility for saving for retirement lies solely at the feet of your grandchildren, and with life expectancy increasing, they’ll need to put away much more to be comfortable in their later years.

Read our guide on the tax implications of gifting money to children.

Balancing risk

Given your granddaughter’s age, you have an opportunity to maximise whatever you put aside by investing the money on the stock markets. When investing in shares, bonds or other investments, generally the greater the risk you take, the higher the potential return. That also means there’s higher potential for losses.

Historically, stocks and shares have outperformed cash over the long term, and while past performance is not a guide to the future and markets can go down as well as up, you’ve got a good chance of riding out the choppy years on the path to greater growth. 

A long-time horizon – be that 15 years for property or education, or even 60 years for retirement – means you can afford to take on some risk with your investments.

Annie Shaw's complete guide to giving money to grandchildren.

Junior ISAs

A Junior ISA is one option to consider. These allow you to save up to £4,080 per annum and the investments grow free of income tax, dividend tax and capital gains tax (CGT). 

However, grandparents cannot open one on behalf of their grandchild. Only the legal guardians of the child (often the parents) can do this. So, you’ll need to discuss the management of the Junior ISA with your children.

If you want to maintain control, you could set up a ‘designated investment account’ (sometimes known as a ‘bare trust’) in your granddaughter’s name. 

This can be set up and managed by you, and there’s no limit on contributions. You can access the money at any time, so long as it’s being used for your grandchild’s benefit, but the profits you make could be subject to income tax, dividend tax or capital gains tax if they breach the tax-free allowances your granddaughter has.

The money within both of these accounts becomes the legal property of your grandchild at the age of 18. 

What are the rules about giving property to children?

Child SIPPs

If that prospect alarms you, and you would prefer to help to give your granddaughter a head-start for her retirement saving instead, a Child SIPP is a great option. You’re limited to contributing £2,880 per year, but with tax relief from the Government, that means a total contribution of £3,600. She won’t be able to access the money until she’s 57 (rising from 55 in 2028).

Now this is only an example, and the outcome could be higher or lower depending on investment performance, but if you tucked away £240 a month (made up to £300 with tax relief) for, say, 15 years, and the money grew by 5% a year, you could help your granddaughter build up a potential pension of almost £80,000. That would be a great start, before she starts saving for retirement for herself.

At Saga Investment Services, we have a range of ways to help you plan and invest for your granddaughter’s future. From a Junior ISA to a Child SIPP and a whole host of investment choices at discounted prices on our Saga Select list, give one of our friendly experts a call to talk through the options available to you.

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Have a question?

If you have any questions about investing for your children and grandchildren, we’re here to help. You can call us on 0800 033 4000. Our team at Saga Investment Services are experts in investments and financial planning and can answer questions on these subjects only. 

Want to know more about investing for children and grandchildren? Visit www.sagainvestments.co.uk/child to download our free guide

IMPORTANT INFORMATION Capital at risk. This article is not intended as advice. If you are unsure whether an investment is suitable, please contact an adviser. SIPPs are not suitable for everyone. Saga Investment Services Limited is a joint venture between Saga and Tilney Bestinvest and is separate from Saga Personal Finance. Saga Investment Services Limited is an Appointed Representative of Bestinvest (Brokers) Limited, which is authorised and regulated by the Financial Conduct Authority (Reg. No. 2830297 with registered offices at 6 Chesterfield Gardens, Mayfair, London, W1J 5BQ), or other members of the Tilney Bestinvest Group of Companies. Saga Investment Services Limited (Reg. No. 09308423) has registered offices at Enbrook Park, Sandgate, Folkestone, Kent CT20 3SE.

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The opinions expressed are those of the author and are not held by Saga unless specifically stated.

The material is for general information only and does not constitute investment, tax, legal, medical or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.