Giving a grandchild a five-figure sum on their 18th birthday may seem out of reach for most people. But, savvy grandparents who save a small amount regularly into a child’s Junior Isa could easily achieve this goal. Not only will this help start grandchildren off on a solid financial footing, it can cut grandparents’ tax bills as well.
Junior Isas are savings and investment accounts that are designed to make it as easy and as lucrative as possible to put money away for under-18s.
All money saved can grow completely tax free – that means no tax on savings interest, investment returns or income. They are almost identical to Isas available to adults, except the annual limit is £9,000 rather than £20,000.
While a Junior Isa can only be set up by a parent or guardian, grandparents – as well as friends and other family members – are able to pay into it whenever they please, without compromising their own personal Isa allowance.
If a grandparent contributes £20 a month from the birth of a grandchild, they will have built up a nest egg worth more than £7,000 by the child’s 18th birthday. The calculations assume investment growth of five per cent after fees. Should they put away £100 a month, the pot would be worth close to £35,500 by the time the child turns 18. This could be an invaluable contribution towards college or university, travel plans or even putting down a deposit on a first home.
Good habits: Putting money into a Junior Isa can help teach children the value of saving
Laura Suter, head of personal finance at wealth platform AJ Bell, says: ‘For grandparents with more cash to splash, putting away the full £9,000 Junior Isa allowance every year from birth will result in a pot worth almost £266,000 by their 18th birthday.’
Grandparents with older grandchildren can still create healthy savings pots by saving regularly. A grandparent who starts contributing £100 a month for a five-year-old grandchild could hand over an account worth just over £22,000 once the child reaches 18.
As the cost of living squeezes household incomes, it is increasingly difficult for parents to save for their children. Grandparents may also be facing the same budget pressures, but those who can afford to may find their contributions are particularly welcome.
Sarah Coles, head of personal finance at wealth platform Hargreaves Lansdown, says: ‘It can be difficult even to think about saving for your child’s future when cash is stretched so thin – especially at the moment – but sometimes the Bank of Gran and Grandad can come to the rescue.’
Buy college fees… instead of toys
Bertie Hale’s four grandparents are all contributing to his Junior Isa every year – although as Bertie is only 17 months old, it could be a while until he appreciates it. His parents, Josh and Natalie Hale, from Stroud, Gloucestershire, opened a Junior Isa for Bertie – whose full name is Hubert after one of his great-grandparents – just after he was born. Josh says: ‘I wanted a tax-efficient, long-term savings vehicle for Bertie, which hopefully will be able to help him with whatever life looks like when he turns 18, whether that’s with university, travel, housing or space flights!’
He adds: ‘We also wanted to encourage our relatives to give money which would be useful to him later on, rather than buying him plastic toys, especially when he’s still at an age where he’ll have no clue as to who has given him what.’ Josh opted for sustainable investments from the fund group Liontrust, accessed through Hargreaves Lansdown. ‘Hopefully the money is put to good use,’ he says.
Josh and Natalie top up Bertie’s Junior Isas every now and then, and Bertie’s four grandparents send his Christmas and birthday present money directly into his account.
Cut inheritance tax bills at the same time
Starting a savings pot for a grandchild can also be a good way for grandparents to reduce inheritance tax bills.
Grandparents can make gifts of up to £3,000 in total every tax year without risking an inheritance tax bill. They can also give more than this amount without it attracting inheritance tax, so long as they live for at least seven years after making the gift.
Some grandparents may also be able to benefit from a little-known inheritance tax allowance, which allows you to give a regular gift from income, so long as it doesn’t affect your quality of life.
Wise: Josh Hale opened a Junior Isa for his son Bertie, one
Inheritance tax is only ever payable if your estate is worth more than £325,000 – £650,000 for a couple who are married or in a civil partnership. Couples can pass down wealth up to £1 million tax-free when bequeathing a family home.
What will they spend it on?
Once the child turns 16, the money invested in their Junior Isa becomes theirs to control, although they cannot withdraw it until they are 18. At this point, parents and grandparents cannot control how the teenager spends it. However, hopefully by showing them the value of saving or investing, they may continue the habit throughout adult life.
Myron Jobson, senior personal finance analyst at investment platform Interactive Investor, says: ‘Bear in mind that you might have earmarked the Junior Isa to go towards funding university education or a house deposit, but they might prefer spending it on a holiday to Las Vegas and a flashy car.’
Allowance loophole if you’re a wealthy teen
Due to an unusual quirk, 16 and 17-year-olds can contribute to a Junior Isa as well as an adult one. That is because Junior Isas can be paid into until age 18, while adult ones can be opened by anyone aged 16 and above. That means that their total annual allowance is a massive £29,000.
In reality, few people this age have these kinds of sums.
If you’re feeling really generous…
Grandparents can also contribute to a child’s pension, helping to set them up for older age as well. You can pay in up to £2,880 a year and this is topped up to £3,600 in tax relief by the Government.
However, the money is locked away until the child reaches the age of 57. If a grandparent paid £100 a month into a grandchild’s pension from birth to the age of 18, by the time the grandchild turns 57, it could be worth around £244,000.
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