Howard Goodship, chartered financial planner and member of the Ringwood financial planning team has written his eighth article in a series on Understanding Investments. To read other articles in the Understanding Investments series please see the articles below or visit our New to Investing web page.
Understanding Investment Articles
Tax efficient saving for grandchildren
‘Many of my clients are retired, have a comfortable lifestyle and are keen to provide financial help to their children and grandchildren. Many are also unsure as to the best way to provide this assistance. They are fearful of indulging the younger generation, whose own lifestyle is far better than their own at that stage of life. I don’t have an answer to square that particular (and very personal) circle, but once you have decided you would like to help, what are your tax-efficient investment options?’
Your tax efficient investment options
I have put pensions at the top of the list despite the fact that they are the least utilized by most grandparents. However, from a tax perspective, they cannot be bettered. Assuming a grandchild doesn’t have any earnings, you may contribute £2880 per annum into a scheme on their behalf and the government will top this up to £3600. That is £720 of free money or, putting it another way, an immediate 25% return on your investment. Charges on pensions have reduced significantly since Pensions Freedom in 2015 and it is possible to invest in a diversified portfolio and pay under 1% per annum to the pension provider. Whilst you probably won’t be around to see your grandchild benefit (no access until they are age 55, rising with the state pension age to 58 in 2044), that also means they can’t access the money if your aim is to avoid that scenario.
Junior ISA (JISA) and Child Trust Fund (CTF)
These must be opened by a parent/guardian but anyone can contribute up to the annual limit (currently £4,368 per annum). The returns will be free from income tax and capital gains tax and it is possible to hold a cash JISA or a stocks and shares JISA (but only one provider for each, which is different to ISA rules). At age 18, the child/grandchild has full access and control over the money.
If your grandchild was born between 1stSeptember 2002 and 2ndJanuary 2011, they will have been eligible to open a Child Trust Fund (CTF), where the government provided an initial contribution. The JISA replaced these so it is not possible to open a new CTF. You can contribute to existing accounts in the same way as a JISA (£4,368 per annum) and the same access rules apply at 18. However, it is now possible to transfer a CTF to a JISA.
Bare Trust or Designated Account
These are accounts which can be opened and run by a grandparent, on behalf of a grandchild, and are taxed as though owned by the grandchild. In practice, this usually means it is possible to earn tax free returns as grandchildren have a personal allowance (£12,500 per annum tax free), personal savings allowance (£1000 per annum if a basic rate or non-taxpayer) and capital gains tax allowance (£12,000 per annum). Grandchildren can access the accounts from age 18.
‘One of the most powerful benefits of all these investments is time! If the right investments are selected and left alone, they have time to benefit from one of the most powerful forces of investing… compound returns. As you can see there are options, and often a combination of solutions can work well (some money accessible at 18 years old and some locked away for retirement). We would be happy to discuss the most appropriate financial solutions for you and your grandchildren in person at our local Ringwood office. Please contact us on 01425 208490.’
The Financial Conduct Authority does not regulate Cash-flow planning or tax advice.