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:
Opening 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 £12,500, a grandparent can fill out an R85 form to ensure any interest is paid without tax being deducted automatically.
Paying into a grandchild's Junior ISAs
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 £4,368 for the tax year 2019/2020
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.
If a grandparent saves the current annual maximum of £4,368 every year until the child is 18 and then leave it invested in a regular adult Isa to grow, assuming the same 5% growth post charges as the Sipp example, the fund will hit £1 million by age 61.
To stay within the £3,000 limit for inheritance tax avoidance purposes - paying this reduced sum into a child’s Junior Isa for the full 18 years, would mean that the fund would hit £1million at age 69.
Money in a Junior ISA cannot be accessed until the child turns 18, at which point the child gains control of the money.
Start a Junior pension
Another alternative is a to save in 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 Junior 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.
Early investment and compound growth are key to making your grandchild a pension millionaire.
Compound growth is the term used for generating income from previous income.
If you contributed £2,880 for the first 18 years of a child’s life, topped up with tax relief to £3,600 and growing at 5% a year after fees, you would have a pot worth £105,197, according to calculations by broker AJ Bell.
If you then left that pot to grow at the same rate without contributing anything more, your grandchild would be a pension millionaire by the time the child is age 64.
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.
Helping with a property deposit
First-time buyers pay an average £231,455 for a home, according to the latest figures from Halifax. Across the UK, typical first-time buyer deposit sizes range from an eye-watering £109,885 in London to a substantial £24,091 in the North East of England.
Helping with a deposit with by lending money to grown up grandchildren, or even gifting it will mean lower monthly mortgage repayments and give them a decent start on the property ladder. Hand-outs from family might be the key to them getting the home they really want.
If you don’t think you could afford a lump sum when the time comes, putting money aside into a savings account or Junior ISA could really help them.
For grandchildren or grown up children aged 18-39 there’s the option of saving in a Lifetime ISA (LISA).
This is a special kind of ISA which lets individuals save up to £4,000 every tax year towards a first home (or retirement), with the government adding a 25% bonus on top of what you save.
Should you max out the limit each year, there’s a free £1,000 on offer. Plus you earn interest on whatever you save, and as it's an ISA, that interest is tax-free.
A LISA would need to be opened by the individual, but you could provide the monthly cash.
The money is only for those who haven’t owned a home before, however.
Find out more about our new Saga Saving accounts provided by Goldman Sachs International Bank.