Saving for Children and Grandchildren

Grandparents today are being told that the financial future of their grandchildren is uncertain

They face rising university fees, house prices out of reach, minimal interest on savings and shrinking pensions. Growing up and moving through adult life has never been so expensive, no wonder grandparents want to give a helping hand through savings and investments. It is estimated that a large number of grandparents are currently putting money aside for their grandchildren, but in a low-interest rate environment and with investment returns patchy at best, what options are available?

Saving Accounts

Savings for children are not automatically exempt from tax, and children have an annual personal allowance. In the tax year 2009 - 2010, that allowance is £6,475 and most children are unlikely to reach that limit, so parents can fill out an R85 form to ensure that interest is paid gross. Several specialist children’s savings products are available. Investing between a minimum and maximum monthly sum, withdrawals or missed payments will result in the interest being reduced. Grandparents wanting to lock away a lump sum can opt for a bond for a fixed rate of interest over anything from six months to five years.

Child Trust Funds

Children born after 1 September 2002 will already have a child trust fund (CTF) set up in their name. Grandparents, as well as any other relatives or friends, can jointly contribute up to £1,200 into a child’s CTF each year, and any interest is tax free. Cash CTFs operate as a standard savings account, with no real risk and a steady, if minimal, growth, whereby Stakeholder accounts invest your child’s money in shares in companies. The Government has made certain rules for these accounts, to reduce the risk of investing in shares. The amount a child would receive from a shares and stakeholder account is dependent on the performance on shares and bonds. Stakeholder accounts are expected to withstand any stock market volatilities and offer much better returns than cash over such a long period of time. One drawback with CTSs is the child gets control of the funds at age 18, where university fees or longer-term savings may not be a high priority.

Share-based Investments

Shares cannot legally be owned by under 18s, but grandparents can save on their behalf and identify their grandchild as a beneficiary, or hold the investment in trust for the child until they reach adulthood. Shares and trusts are an ideal form of savings for the long term. Most provide the option of regular monthly saving and they’re tax efficient, as any profit is offset against the child’s capital gains tax allowances, which is £10,100 this year or £5,050, if held in a trust.

Stakeholder Pensions

Grandparents can also set up a stakeholder pension and invest up to £2,880 a year on behalf of a child. The Government tops up the contribution with tax relief. The extremely long investment timescale means there is great potential for high levels of growth. Levels and bases of, and reliefs from, taxation are subject to change. The value of your investment, and the income from it, can go down as well as up and you may not get back a significant proportion of your investment. Past performance is not an indication of future performance. Please contact us for further information or if you are in any doubt as to the suitability of an investment.