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Savings and Investing for Grandchildren: ISAS, best investments & bonds

As your family grows, it’s common to want to start helping the next generation financially, so that they are better prepared to take on the rising costs of higher education, the housing market or even to pay for a wedding or the high costs of raising a child in the UK. But what is the best way to invest your money in their future?

What are the savings for grandchildren optionsJISA, Child’s Trust, Premium bonds of children, and other investment accounts
Can I open a savings account online for my grandchild?Yes, you can if you have documentation proving your grandchild’s identity
How much can a grandparent give a grandchild tax free?The maximum amount you may give your grandchildren tax-free is up to £3,000 by each grandparent in a single tax year
Can I buy premium bonds for my grandchildren?For a grandchild under the age of 16, grandparents may invest on their behalf

Why Investing and Saving for Your Grandchildren’s Future is Important

There are several reasons why investing and saving for your grandchildren’s future is important.

Financial Security: Saving for grandchildren can provide financial security as it offers them a safety net in the future. Setting aside funds for investing for grandchildren can help pay for a first home purchase and tuition. Higher education can be expensive, depending on the university. Instead of taking out a student loan or debt, the savings contributions from a grandparent can help elevate such burdens.

Compound Interest: The advantage of investing for grandchildren is compound interest. Starting early gives your grandchildren’s funds the potential to grow exponentially over time.

Legacy: You leave a legacy when you save and invest for your grandchildren. Grandparents can pass down their wealth and knowledge to their families, and this financial security can be generational.

Tax Benefits: Lastly, savings for grandchildren has its tax benefits. For example, grandparents can save a substantial amount into a tax-efficient savings account (JISA) every year. The annual allowance and interest earned or investment gains on a JISA are tax-free.

How do I invest in my grandchildren UK?

Luckily, parents and grandparents have a lot of options when it comes to their investment strategy for making sure their children or grandchildren start off on the right foot. Some of the best, most efficient ways of investing in your grandchildren are opening a Junior ISA with their parents and contributing regularly or contributing to a child’s pension fund. You can also open a savings account for them and make regular contributions in the form of a gift (up to £3,000 annually, depending on your circumstances). Alternatively, you could decide to let them receive your pension payments and change your will to leave them part of your estate when you pass away.

What accounts can grandparents open for grandchildren?

A great way to start educating your grandchildren about money is to open a savings account for them. Opening a savings account for your grandchildren can be a good moment to start teaching the children the value of saving money rather than using it all up immediately.

When it comes to the different types of accounts that you can open for your grandchildren, there are a variety to choose from, like regular savings accounts, trusts, ISAs, or pension schemes. Still, the best type of account to open for grandchildren depends on how much and how often you want to contribute to the account.

What is the best way to set up a savings account for a grandchild?

The best savings for grandchildren depends on what you anticipate using the funds for, how much you want to contribute to the account, and how much access you want your grandchildren to have. To open a savings account in the name of your grandchild, you just need to present a valid form of identification documentation, like a birth certificate, to open these kinds of savings accounts for their grandchildren.

The benefit of opening a savings account for your grandchild is the stability and certainty of the interest that the account accrues over time. Regular savings accounts usually have good rates but may require you to make a minimum payment into the account each month to be eligible to earn interest. With a regular savings account opened in your grandchild’s name, they will be able to access the money in the savings account as soon as you give them access to the account, which means that they could use the savings to pay for anything.

If you want more of a say on how your grandchild uses the money or when they can access it, you should consider opening a trust, Junior ISA, or pension scheme.

Can I open a savings account online for my grandchild?

Yes, you can if you have documentation proving your grandchild’s identity, you can create a savings account in their name as a grandparent (like a birth certificate).

If a grandparent gives your grandchild the money, and in some cases, the money that is given is eligible to be considered tax free savings for grandchildren.

How much can a grandparent give a grandchild tax free?

With the present Inheritance Tax (IHT) allowances, contributing sparingly and frequently can enable you to minimize or completely eliminate your IHT burden. The maximum amount you may give your grandchildren tax-free is up to £3,000 by each grandparent in a single tax year. Anything more than that will be subject to taxation via IHT.

If you don’t make use of the entire allowance, what remains of your £3,000 can be carried forward to the following tax year. You can thus give away a total of £6,000 in the following tax year if you don’t make any financial presents in one tax year.

Can I set up a stocks and shares ISA for my grandchildren?

If you’re thinking ahead and want to assist your grandchildren when they get a little older, get a Junior ISA. Junior ISAs for grandchildren must be opened by a parent or legal guardian, but once it’s been opened, anyone can begin investing for grandchildren. However, the annual allowance on Junior ISAs for 2023-24 is £9,000 cap, making it a fantastic method to encourage young people to invest for their future and guide them toward financial security.

Perhaps the best investment for grandchildren, a Stocks and Shares ISA facilitates grandparents investing for grandchildren in the stock market, and any earnings that are made from the investments are not subject to capital gains taxes. Even though keeping money in cash may seem safe, investing for up to 18 years offers a better chance of outpacing inflation, given the current low interest rates. If your grandchild is a newborn, see what the best ISAs are for babies and young grandchildren.

Common mistakes to avoid when investing and saving for your Grandchildren

Here are some common mistakes to avoid when investing and saving for your grandchildren.

Choosing the wrong savings or investment account: Choosing the right savings and investment account is important as interest rates can have an impact on the total savings amount. A JISA is a popular option for grandparents, but explore other options such as a child’s trust, premium bonds, and other investment accounts. Just make sure your savings for grandchildren suits your financial needs and goals.

Non-diversified investments: Not diversifying can be very risky. Instead of investing the funds in one type of investment, spread it across different assets, such as stocks, bonds, and mutual funds.

Tax implications: Not considering the tax implications on your savings for grandchildren can impact how much your grandchildren may receive. So, it is important to understand the different tax implications of saving and investing for grandchildren. Consult with a financial advisor is recommended.

Not starting early. The earlier you start investing, the better, as the money has more time to grow through compound interest. A non-early start can significantly reduce the amount of money available for your grandchildren’s future.

Lack of communication: Not communicating your intentions with your grandchildren can have a negative effect as they might not be aware of the intended purpose of the money. Grandparents should ensure proper communication with their grandchildren about their intentions.

Can I buy premium bonds for my grandchildren?

Investment bonds for grandchildren can also be a good idea for helping to start building their financial wealth. On behalf of the UK government, National Savings & Investments (NS&I) has issued premium bonds, a kind of savings account that may accrue interest over time. NS&I premium bonds for grandchildren can be a good option to start generating steady wealth since investors receive a chance to win up to £1,000,000 in a random drawing in place of interest.

Premium Bonds can be purchased by anyone who is 16 years old or older. For a grandchild under the age of 16, (great) grandparents may invest on their behalf, and you can put as little as £25 or as much as £50,000. Your grandchild won’t need to pay interest on Premium Bonds. However, this form of savings for grandchildren has no guaranteed return. Instead, for a chance to win tax-free prizes, your bonds can be entered into a monthly prize draw.

How much money can grandparents give grandchildren UK?

A final way to ensure your family’s financial security in the future is to decide to leave some of your fortunes to your grandchildren through your last will and testament. There are several ways to leave money behind, but there are taxes to pay. Some options include leaving a large sum in an individual savings account (ISA), topping up an ISA on a regular basis, or leaving a big sum in your will.

Although you can give your grandchildren or kids a respectable sum of money, whatever you give them beyond a specific amount will be subject to tax. Anything you leave to your beneficiaries beyond the inheritance tax threshold (IHT) of £325,000 will be subject to tax, typically at a rate of roughly 40%.

FAQ

What are NS&I Premium Bonds?
A debt instrument backed by the government that accrues value at a set rate over time.

What is the Inheritance Tax Threshold?
The ITH limit is £325,000, everything above which will be subject to tax at a rate of roughly 40%.

What is the annual allowance for paying into my grandchild’s ISA?
The annual allowance on Junior ISAs for 2023-24 is £9,000.

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*Capital at risk. Tax treatment depends on your individual circumstances and may be subject to change in the future.