How to invest wisely for your grandchildren?
by MATHEW ANGELL, Dip PFS
Investing for your grandchildren is a wonderful gift for their future. Giving them a healthy financial start to their adulthood might help them fund further education, get a foot on the property ladder, or explore the world without worrying about covering the costs of halfway decent hostels.
Along with a sense of financial independence, making investments for children early in life is a great way to help them learn important lessons about money. As your grandchildren get older, you can involve them in conversations and decisions about where and how their money is invested.
Read on to discover the benefits of investing for your grandchildren and how you can do this.
Invest while your grandchildren are young and reap the rewards of compound interest
Compound interest on investments means the earlier you invest the better.
The biggest advantage when investing for your grandchildren is that the money you put away is likely to be invested for several years. This means you can invest with a long-term approach and enjoy the potential benefits that brings.
Whatever the money will be used for, take full advantage of those first 18 years of compound interest and you’ll be in a powerful position to generate wealth, which could make a real difference to their potential life choices in early adulthood.
What should i consider when investing for a child?
There are a few factors to think about before you choose where to invest your money:
- Timescale – how long before you or they will need to access the funds?
- Risk – how much risk are you prepared to take with the aim of better returns?
- Tax – do you want to ensure a tax-efficient investment plan?
- Charges – what associated costs are involved when setting up, managing, and accessing the investment?
We can help you understand the choices available and explain the tax situation and any ongoing costs associated with investments for grandchildren. We can also help establish access arrangements and mitigate any Inheritance Tax implications.
Invest tax-free using a junior isa
While parents or guardians must open a Junior ISA (JISA), the money belongs to the child. Your grandchild can access the money when they turn 18.
A Stocks and Shares JISA is a useful long-term investment vehicle. Any money put into a JISA is free of tax and you can invest up to £9,000 (2021/22) each year.
Saving just £500 a year into a Stocks and Shares JISA can really add up. If you put £500 into a JISA a few months after your grandchild is born, and again before every birthday, by the time your grandchild reaches their 18th birthday the investment could be worth almost £14,350 (assuming 5% investment growth each year, less 1% annual charges).
Investing in a JISA guarantees the money definitely goes to your grandchild, since it’s only the child who may access the money when they turn 18. If they don’t want to take the money out of the ISA at this stage, the account will transfer to an adult ISA, allowing them to keep the funds invested.
There are various JISA products available. With a wide range of investment sectors to choose from, it’s wise to talk to a financial planner to make sure you’re making a sound decision on behalf of your grandchild. Get in touch if you’d like to discuss the options.
Start contributing to a pension
An alternative to a JISA is to save into a pension. This may seem absurd when your grandchild is possibly still in nappies, but it’s an interesting proposition.
A parent or guardian can open a pension for a child. Once set up, any family member can invest.
Free from Income Tax and Capital Gains Tax, you can invest £2,880 tax-efficiently each year. The government automatically tops up contributions by 20%, so an annual payment of £2,880 automatically becomes £3,600.
As an example, if you invested the maximum of £8,640 (£10,800 including the government contribution) over just three years, the pension could be worth £350,943 in 50 years’ time, with 25% available as a tax-free lump sum when they reach pension age, under current legislation. (Example assumes an average growth rate of 2.5%, with no early withdrawals.)
Any growth is free of tax which helps it to increase in value. Like any investment, its value can go down as well as up.
If you want to invest for your grandchildren and you’re not sure what’s the best option, or what type of fund you should use, we can help.
Please email us at email@example.com or give us a call on 0330 1180210 to discuss your wishes and how we can help you give a financial gift to your grandchildren.
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.
Levels and bases of, and relief from, taxation are subject to change.
ABOUT THE AUTHOR
MATHEW ANGELL, Dip PFS
Director & Financial Lifestyle Planner
Matt’s goal is to help you develop great financial habits and make sure your life is at the forefront of all plans that are put in place. His vision is to be your trusted partner through your life, there to help you through the difficult times and appreciate the good.