Tax treatment depends on your circumstances and is subject to change
What better gift can you offer your grandchildren than a springboard towards a secure and fulfilling future. If you are lucky enough to be able to put a lump sum away or enough to drip feed into a savings account on a regular basis, then it can be really rewarding to know you have left your loved ones a legacy they will remember you by and enjoy long after you have gone. But with the economy in a bit of a whirlpool and with so many different types of account to choose from – where is the best place to save your money?
Let’s take a look at the pluses and minuses of some of the usual suspects and some of the more modern savings opportunities.
Premium bonds are as British as fish and chips and it sometimes seems as if they have always been a popular option for gifting to our children’s financial futures. But unlike a traditional savings account there is no set interest rate. The money you save instead is placed into a monthly prize winning draw. It may add a bit of fun to putting money away, but is it the best way to maximise returns for your grandchild?
Rather than a set interest rate, Premium bonds publish the rate of winning, which in May 2017 was 1.15%1. Your grandchild may get that big win but this approach to saving for their future is perhaps more akin to putting money into a lottery. Even though interest rates are quite low a high street bank would at least offer some form of fixed rate of growth.
In these rather bleak days of austerity and the possibly turbulent days of Brexit, interest rates are likely to be low at least for the short-term. So, putting money into a bank account or building society account may not be the best place to see your investment grow.
Having said that, it is worth shopping around. You can find good deals on savings accounts especially designed for parents and guardians wishing to save for their children. Generally, this type of account offers a high amount of interest in the first year. Some accounts can offer up to 4% interest in the first year if you are contributing a regular amount between £5 and £100 per month2.
An ISA can be a great way to save for your grandchildren’s short to medium-term future. Some have restrictions to prevent withdrawals for a set period of time, but they all come with the advantage of tax-free interest and tax-free withdrawal. This year (2019/2020) your grandchild’s tax free allowance is £4,368. Tax treatment depends on your individual circumstances and may be subject to change.
As your grandchild grows you can continue topping up contributions when you want to and it will be a great gift and financial springboard into adulthood on the child’s eighteenth birthday. There are two types of Junior ISA:
How about helping your grandchild get on the housing ladder? The “Lifetime ISA” and the “Help to Buy ISA” could be a great springboard to your grandchild’s first home. You cannot put money directly into their account but you can gift money to them that is meant solely for contribution to these great savers.
In order to encourage young people between the ages of 18 and 39 to save for a home, this government initiative offers savers the chance to receive a 25% government bonus on their contributions. You can help your grandchild open their own account and they will receive tax relief on contributions of up to £4,000 per year.
A Lifetime ISA can also be used as a retirement nest egg if it is not used to buy a home. But as a way of saving for retirement it is unlikely to perform as well as a pension. This is because you are only allowed to contribute £4000 tax free per annum (you can contribute £40,000 with tax relief into a pension); a LISA has a lifetime contribution limit of £128,000 (a pension has a limit of £1 million before you would face a tax charge); and because pensions can be invested in funds which are more likely to provide a higher return than banks providing an ISA. Savings cannot be released from a LISA until the age of 60 without incurring a charge.
Another great introduction to the world of mortgages. They would need to open this in their own name and they can do this from 16. Regular contributions can bring that first house into a reality rather than a distant dream. With “Help to Buy” they can receive a bonus of up to £3000 towards the deposit for their new home. Contributions need to be £1,600 before they can claim the minimum government bonus of £400.
Saving for the distant future may not be as exciting to a child as a lump sum of money in the short term but the rewards from starting your grandchild early on a pension are perhaps immeasurable. The children’s pension offers tax relief on contributions and any growth on the lump sum is not taxed either – it also provides all the normal benefits and features you would expect from a personal pension. It is a great way to instil the ideals of saving for retirement in an aging world to a young mind and gives you the satisfaction of knowing your grandchild will have security and the chance of rich opportunities in their later life. The children’s pension allows you to contribute up to £3,600 per year inclusive of tax relief and any growth on the lump sum is not taxed either.
Thinking of how your pension can be inherited if you die? You now have more options than ever before when it comes to passing on your remaining pension money. And the way it’s taxed is a lot fairer than it used to be. Find out more here.
1http://www.telegraph.co.uk/personal-banking/savings/premium-bond-prize-cuts-may-2017-odds-winning/
2https://www.halifax.co.uk/savings.html
We can help you to make the best possible decisions when it comes to your pension.
Taking pension money early is not right for everyone as it will leave you worse off in retirement. Also, tax treatment depends on your circumstances and is subject to change. That’s why it makes sense to get help from a regulated specialist.
