How to Invest for Your Grandchildren
Like many grandparents, you might enclose a cheque or, more likely, a £20 or £50 note with the birthday and Christmas cards you send to your grandchildren.
Many will say that is a nice thing to do.
On the other hand, considering how little thought or effort it requires, some might well think it rather dismissive, even a bit mean.
There are better ways to provide financial support for grandchildren – better not only for them, but also for yourself.
Indeed, so well-recognised is the wider economic benefit of such gifts that, in the UK and many other countries, investing for children receives active government support by means of tax breaks, and from financial services providers in the form of specialised investment products and services.
As with every other kind of savings plan, you need to define parameters before investing anything.
How old is the child?
How old is the donor (you)?
At what age should the child have access to the accumulated savings? For what objective: an all-purpose nest-egg?
School fees? University? A first home?
You can even put the money towards the grandchild’s eventual retirement, several decades into the future; starting at birth and saving just a few hundred every month until the child is 18 could give them a pension pot of £500,000 by the time they are 60.
The way in which the money is paid by the grandparent is also important.
Will it be a lump sum, paid once and for all, or will there be periodic smaller payments: monthly, quarterly, annually, or simply whenever you have some spare cash?
If you are rich, you might feel none of this matters because you have arranged to bequeath your grandchildren a substantial sum in your will.
However, that could mean a significantly higher tax bill for you, because regular donations into recognised saving schemes and products may, if certain conditions are met, be offset against income or inheritance tax.
It could also mean a higher tax bill for your grandchild, because you miss out on UK saving products that pay interest without prior tax deduction.
In other words, it’s complicated, so the first step is to consult a financial adviser.
Having established with them the answers to these questions, here is an outline of the main options you will likely be offered.
Junior ISA
Individual Savings Accounts, or ISAs, are tax-efficient UK arrangements with a variety of options.
This one is designed for children born after 3rdJanuary 2011 but still under 18.
It can only be established by the child’s parent or legal guardian, but anyone can contribute.
Contributions totalling no more than, currently, £4,260 in any tax year are permitted and the child cannot use the cash until they turn 18, but no income or capital gains tax is payable when they do so.
There are three investment options: cash, stocks and shares, or a mix of both.
Junior SIPP
For those looking to grandchildren’s longer-term needs, this version of the Self-Invested Personal Pension, sometimes called a stakeholder pension, has strong appeal.
Like the Junior ISA, only the child’s parent or legal guardian can set up the plan, but anyone can contribute.
Unlike Junior ISAs, however, such contributions, up to a current tax-year limit of £3,600 per child, automatically qualify for 20% tax relief, so you only need to contribute a total of
£2,880 per child to reach the limit.
In effect, the government is giving you £720 in ‘free’ money.
Moreover, the child cannot use the money until the age of 55, under current rules.
The sum saved in a Junior SIPP remains exempt from capital gains and income tax, apart from 10% dividend-income tax deducted at source.
For grandparents, contributions can be sheltered from inheritance tax.
Additionally, as they grow older, the grandchildren can get involved in the plan’s investment decisions and, once they start earning themselves, can make their own contributions.
There could hardly be a better way to help youngsters become confident in managing their finances.
So, for those grandparents who prefer, or cannot afford, substantial lump-sum gifts, a combination of a Junior ISA with a Junior SIPP could be the perfect way to help a new generation start and end their working lives on solid financial ground.
Trusts
For those grandparents who can afford to make a substantial gift, a trust may be the most effective option.
It can be established at any time, even included in the terms of your will, and there are several different types: bare trust (frequently used for Junior Investment Accounts offered by some financial advisers), ‘interest in possession’, discretionary, mixed, and others.
A trust can minimise inheritance tax, because the entrusted assets actually belong to the beneficiary or beneficiaries, not to you and, so, may not be subject to the tax if the trust meets certain conditions.
There are no contribution limits and almost any type of investment can be included – property, shares, bonds, unit trusts, OEICs, ISAs, art, etc.
You can find a fairly comprehensive overview here: https://www.moneyadviceservice.org.uk/en/articles/using-a-trust-to-cut-your-inheritance- tax (https://www.moneyadviceservice.org.uk/en/articles/using-a-trust-to-cut-your- inheritance-tax).
Trusts are highly flexible, both in terms of the investments they can use and the age and circumstances under which the assets are disbursed to grandchildren.
However, they are also expensive and complicated to set up, so you must consult an expert, preferably, a lawyer or registered financial adviser with the requisite specialised knowledge.
Investments
So much for the available vehicles, but what about the underlying investments?
The beauty of investing for grandchildren is the long timespan before the assets are drawn down.
That means you can afford to take much more risk.
Don’t even think about a cash ISA, therefore; at the low interest rates currently prevailing, its returns will barely cover the cost of inflation, if at all.
So, whether contributing a Junior ISA, Junior SIPP, or a trust, make sure the investments include some riskier selections, such as, either directly or through funds, emerging markets and smaller companies.
Don’t go overboard, however. Such investments should never be more than about 25% of the assets.
Above all, as far as saving is concerned, the longer the time horizon, the bigger the ultimate pot will be.
So, get started as soon as possible.
Paul Connolly
Paul Connolly has been a journalist for more than 20 years, as a reporter and editor for Argus Media, Reuters, The Times, Associated Newspapers and The Guardian. He has covered Islamic Finance for Reuters in the 1990s. Paul has since helped launch three newspapers, as well as reported from Tokyo, Los Angeles and Stockholm.
