Money
Getting the best deal
How to save for your grandchildren - part two
It is also possible to put your money into "passive" funds, where the manager simply invests in all the shares that make up a stock market index, such as the FTSE 100, which comprises the UK's 100 biggest listed companies. Such "tracker" funds tend to have lower charges than their actively-managed cousins.
It is also possible to invest in something called an "exchange traded fund", which acts a bit like a tracker in that it allows you access to a variety of shares from a particular index, but which can be even cheaper.
Whichever investment you choose, make sure you understand the impact that charges will have over its lifespan. There are companies known as "discount brokers" which will refund some of the charges normally levied when you set up an investment.
Higher charges are just one reason to treat with caution the various child-branded investment products which are available. Although they can allow you to invest small amounts, they tend to be expensive and, enticing free gifts notwithstanding, you may not get access to the best or most suitable investments for your circumstances.
Although some funds are designed to produce an income for investors, the main objective of stock market investment is capital growth, which is why they should be held for the long term. You can sell at any stage, but that will have a direct impact on the money you get back.
Assuming the value of the investment has increased, when you (or your grandchild) sell it there may be capital gains tax or CGT to pay on the profit.
As with income tax, everyone (including you and your grandchild) has an annual capital gains tax allowance - £8,800 for 2006-07. Any gain above that is subject to CGT; the rate paid will depend on other income.
Buyer beware
Grandparents should also be wary of another type of stock market-linked investment which is heavily marketed to grandparents by Friendly Societies. Tax Exempt Savings Plans are regular saving endowment policies, designed to be held for at least 10 years. Premiums can be as little as £10 a month.
Their big selling point is that, thanks to the special status of Friendly Societies, you can save up to £25 a month or £270 a year per child, tax free. The lump sum the child receives when the policy matures is also tax free.
But that is really all they have going for them - the charges on these products are generally high and the money is tied up for at least a decade. As with all shares-based investments, there is no guarantee that you will get back what you invest, but you will definitely have to pay a penalty if you need to withdraw the money early.
Thumbs-up:
Shares have tended to out-perform cash investments. Huge range of funds available.
Thumbs-down:
Returns are not guaranteed. Investments have to be held in grandparents' name.
Useful links:
www.aitc.co.uk/guide/how_to_invest/children.asp
www.aitc.co.uk/files/factsheets/ChildrenFactsheet.pdf
http://www.hmrc.gov.uk/trusts/
Adults only: Pensions
There is another, rather unexpected, way you could save for your grandchild's future. Given the widespread concern about the fact that we are all living longer, and the impact of that on our retirement provision, you could take a very long view and start a pension for them.
It is possible to set up what is called a "stakeholder" pension for any UK resident under the age of 75, whether or not they have a job, which is why children qualify. They become responsible for the pension when they turn 18 but cannot access the money in the fund until they are 55, although they do not have to continue contributing to it.
A stakeholder is a type of private pension designed to provide a lump sum which can be used to buy an income in retirement. The amount of money it ultimately provides is not guaranteed, depending on the contributions made, the size of the fund at retirement, and way that lump sum is converted into an income.
All stakeholders must meet a set of minimum standards devised by the government. These include no upfront charges, and a maximum annual management charge of 1.5% for the first 10 years of the policy's life, 1% thereafter. Providers cannot penalise you for stopping contributions or transferring funds to another scheme, and must accept contributions as low as £20 whether as a lump sum or regular payment - some will accept smaller amounts. Policyholders can take a quarter of their fund as a tax-free lump sum when they retire, which they can do at any time between the ages of 55 and 75.
For those with no earnings (such as children) the maximum you can put into a stakeholder pension every year is £3,600. However, because the government gives tax relief on pension contributions, in practice the most you would invest is actually £2,808. HM Revenue & Customs then adds 22% basic rate tax relief on top. That amounts to another £792 which takes the total paid into the fund up to the £3,600 maximum.
Stakeholder pensions are sold by a range of providers including insurance companies, high street banks and investment managers. Although every stakeholder must meet the government criteria, each offers a choice of different types of funds for your money. These might involve investing in a mixture of cash, bonds, shares, and property.
The main advantage of stakeholders for children is that money invested on their behalf could potentially grow for 50 years. In fact, some providers argue that contributions made during the first 18 years of life could be worth more than the equivalent amount of contributions made during the subsequent 42 years between 18 and 60. (Axa)
But it is important to understand that stakeholders are not flexible investments: under current rules, the fund cannot be accessed before the age of 55 (except through ill-health). And then it must be used to provide an income. So although money saved in a pension may offer your grandchild a better standard of living 50 or 60 years down the line, it cannot help them go to university, travel the world, buy a house or get married in the meantime. Whether that is an advantage or a disadvantage will depend entirely on your perspective.
Thumbs-up:
Tax relief on your contributions. Money could benefit from 40 or 50 years' stock market growth. Provides for your grandchild's retirement.
Thumbs-down:
Very inflexible. Money not available until 55. Pension rules could change radically between now and then, potentially undermining the value of the investment.
Useful links:
