Giving your grandchild financial security is an important goal for many grandparents.
There are ways to save and invest for grandchildren that can have a more lasting effect on their financial independence beyond cash in a Christmas and birthday card each year. Lots of options exist that are tax efficient for them – and you too.
You could even make them a millionaire, which sounds like a pipedream – but if you start saving early, it’s an achievable goal.
Here are the main options for making sure your grandchild is financially secure
Setting up a savings account for a grandchild
A grandparent can open a savings account for their grandchild in the child’s name as long as they have documentation, such as the child’s birth certificate.
There are lots of accounts specifically for children but the most important point is the rate paid, rather than any gimmicks.
An advantage for grandparents is that no amount of interest earned on money they put in is subject to tax. As long as a child earns less than the personal allowance, currently £10,000, a grandparent can fill out an R85 form to ensure any interest is paid without tax being deducted automatically.
Read our guide to tax and giving money to children.
Setting up a Junior ISA for a grandchild
Grandparents are not able to open a Junior ISA for their grandchildren but once one is set up by parents, they can make contributions up to the annual limit, which is £4,000 for this tax year.
Like the adult version, it can hold cash as well as a variety of investments including individual stocks and funds.
However, advisers argue that parents should opt for a stocks and shares account for those investing when the child is young. Over 18 years these will almost certainly outperform cash, especially given current low interest rates.
Money in a Junior ISA cannot be accessed until the child turns 18, at which point the child gains control of the money.
Junior ISAs are only for children under 18 who do not have a Child Trust Fund (CTF). If your grandchild was born between 1 September 2002 and 2 January 2011 the Government would have automatically opened a CTF on their behalf so the child will not be eligible for a junior Isa.
In 2015 the government is due to change the rules to allow parents to convert CTFs into junior ISAs.
Find out more about the rules around giving money to young children.
Setting up a pension for a grandchild
Another alternative is a pension. It might seem an absurd concept for someone who is still learning to walk - but the argument is compelling.
Parents or other family members can invest in a self-invested personal pension (Sipp) for a child, up to a maximum of £3,600.
Thanks to the tax breaks that come with saving in a pension, this means actually investing £2,880 – or £240 a month - with the balance being automatically reclaimed from HM Revenue & Customs.
The benefit of compound growth over the long term is key. If you were to invest £300 a month into a SIPP for the first 18 years of a child’s life it would cost you £52,000. Even without the child makes no further contributions themselves throughout their working life, this pot could grow in excess of £1 million.
There is no minimum age so a junior SIPP can be started the day the child is born. The pension fund is outside the estate for inheritance tax purposes so this could become a valuable exercise if you need to reduce the value of your estate.
Paying a property deposit for a grandchild
First-time borrowers pay an average £209,000 for a home, according to the Office for National Statistics. The Higher Education Commission recently warned that low-earning graduates may struggle to get a mortgage in future because of higher university tuition fees.
The bigger the deposit the lower the mortgage rate you will pay. Helping with a deposit with by lending money to grown up grandchildren, or even gifting it will mean lower monthly repayments and give them a decent start on the property ladder.
Read our guide to the things to consider before signing property over to children.