There are a number of ways grandparents can contribute toward their grandchildren’s savings and this can be done tax efficiently whilst at the same time passing wealth down the generations.
Whilst different savings vehicles are available, in general although cash may seem like the most secure option with guaranteed returns such deposits are not without risk as interest may not keep up with inflation.
Using deposit accounts or bonds through bank or building society accounts will ensure the child will not lose money but they may be able to buy less in the future than they effectively could today.
On the other hand, although a child could get back less than invested, it is widely accepted that equities (shares) tend to outperform deposits over the longer term. They are of course more volatile and will undoubtedly suffer the usual ups and downs associated with the stock-market.
As is usual with these arenas it very much depends on the objective, the term, the tax position and the appetite for risk etc.
There are a number of opportunities for grandparents who do not wish to use the standard deposit methods:
Whilst different savings vehicles are available, in general although cash may seem like the most secure option with guaranteed returns such deposits are not without risk as interest may not keep up with inflation.
Using deposit accounts or bonds through bank or building society accounts will ensure the child will not lose money but they may be able to buy less in the future than they effectively could today.
On the other hand, although a child could get back less than invested, it is widely accepted that equities (shares) tend to outperform deposits over the longer term. They are of course more volatile and will undoubtedly suffer the usual ups and downs associated with the stock-market.
As is usual with these arenas it very much depends on the objective, the term, the tax position and the appetite for risk etc.
There are a number of opportunities for grandparents who do not wish to use the standard deposit methods:
- Junior ISA – this has a maximum limit on contribution of £4128 per annum. It is very tax-efficient in that is free from UK income and capital gains taxes, however it is inaccessible until age 18 – some regard this as a negative some as a positive.
- Investment account – this is where assets are held in trust for the grandchild until they reach age 18. Although it does not have the tax-advantages of the JISA, it does allow earlier withdrawals and can be useful for inheritance tax planning as gifts to trust can reduce the value of the grandparents estate. There are also no investment limits.
- Pension – contributions toward a child pension benefit from 20% tax relief, up to the annual limit for most children, being £3600, so in effect this only costs the contributor £2880. These are very tax-efficient, but are very much designed for the long term, as they follow usual pension rules and cannot be accessed until retirement.
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