Keeping it in the family
Today, over a third of children (36%) receive cash support from a generous grandparent, double that of in the Eighties. Help with home-buying, cash gifts and rental payments are the three top handouts, says Lloyds Bank.
If you want to contribute, the sooner you can start, the better: "Saving small regular monthly amounts can really help build a useful cash pot over the longer term," says Phillip Robinson at Lloyds.
What's on offer
Children's savings accounts
These work like adult accounts, and are available to children up to the age of 18. Anyone can open a children's saving account in the child's name but the provider will want to see documentation for example, the child’s birth certificate.
"You can open some accounts with £1 but bear in mind most have their own maximum investment limits,” says Rachel Springall at Moneyfacts.co.uk.
Also, if a child earns £100 or more in interest from money given to them by a parent (or step-parent), there will be tax to pay – even if the child has not exceeded their income-tax allowance.
"However, this £100 rule does not apply to money given to the child by a grandparent, although there may be inheritance tax to pay if the person making the gift dies within seven years of making it," adds Rachel.
Tip: Nationwide, Halifax , HSBC and Lloyds Bank pay 3% interest. Find best rates here.
A popular gift for youngsters, these can be bought on behalf of a child by a grandparent but a parent (or guardian) looks after the bonds until the child's 16th birthday. You can invest £100 to £40,000. More at NSandI.com or call 0500 007 007.
Tip: Although premium bonds don't earn interest, they are entered into a monthly prize draw with two £1m jackpots and other tax-free cash prizes on offer.
These are tax-free bonds offered by NS&I and can be bought by grandparent for a child but a parent oversees the investment. These five-year investments earn interest yearly and pay out a bonus at the end of the term. Currently, issue 35 pays 2.5% on £25 to £3,000. Children access the cash at 16. More info here.
Tip: Beware you are locked in, so may miss out on better rates.
Only a person with parental responsibility can open a Junior ISA (JISA). However, grandparents can then make contributions up to the £4,000 annual limit.
There are two JISA types:
- A cash JISA - you won't pay tax on interest on the cash you save
- A stocks and shares JISA where cash is invested and you won't pay tax on capital growth or dividends you receive.
A JISA matures into an adult ISA when the child turns 18.
Tip: Parents are now able to transfer child trust funds to JISAs. "This is great news because JISAs pay better interest rates and are tax-free," says Rachel Springall.
Best buy cash Jisas: The Halifax 4% Junior Isa (parent must own the Halifax Cash Isa to get this deal), otherwise the Coventry BS 3.25% JISA.
Children's savings are likely to work harder in the stock market over the longer term
Cash may be safe, but children's savings are likely to work much harder in the stock market over the longer term.
Danny Cox at Hargreaves Lansdown says: "Stocks and shares JISAs offer better investment choice and often lower charges than child trust funds, so transferring makes sense for many children. You could choose funds, individual shares, ETFs (funds traded on a stock exchange) or a simple, low-cost tracker fund (follows performance of shares in an index, e.g. FTSE 100) - and investing within a JISA means no tax to worry about."
Tip: For a list of JISA offerings, see here.
Create a pension fund
Maximising a child's £3,600 annual pension allowance from birth to 18 could lead to a £1.14m fund by the time they hit 65. Anyone under 75 can invest in a pension.
"The effects of making early savings for your grandchild's future can be considerable due the impact of compounding returns," says Andy James at wealth adviser, Towry.
"Plus, there's less pressure on the adult child to make pension savings meaning surplus income can be put towards living expenses." You set this up in your grandchild's name.
Tip: A financial adviser can help with this savings approach. Find one here.
Help to Buy ISAs
The Chancellor George Osborne announced in The Budget in March that people will be able to open an ISA, save up to £200 a month toward their first home and the Government will boost it by 25%. So they will receive £50 for ever £200 saved, up to £3,000. “Accounts will be available through lenders this autumn,” says Gov.uk. Find out more here.
Gifts to grandchildren will be exempt from inheritance tax (IHT) if they are less than £250 each per year, less than the overall annual allowance of £3,000, or a gift using the 'surplus income' exemption. Other than this providing the person gifting survives seven years, the gift with be free of IHT. More info here.
- Like this? You can now transfer a child's Child Trust Fund to a Junior ISA. Read our handy guide here.