Make your grandchild a millionaire
Having grandchildren is great, and it creates the ideal opportunity to spoil someone very special to you. But when the toy box is full and the wardrobe is creaking, have you thought about what your grandchild may appreciate when they’re that little bit older?
How would you like to be able to give your grandchild £1.8m for their retirement? NMTBP shows you how
Mention pensions and many people think immediately of old age. But in fact you can start saving for your retirement from the day your’e born. About 60,000 children have pensions, according to HM Revenue & Customs, and the number is increasing as more families who can afford to lock up their money for 50 years or more take advantage of the tax breaks
Pension rules state that you can start a pension (also called a junior SIPP) for a child immediately after they’re born, even if you’re not related. Once you’ve opened the pension, you – along with anyone else who wants to chip in – can put up to £2,880 into a pension plan every year. The government adds £720 to that in tax relief, meaning £3,600 could be invested every year. This money can then grow without incurring income or capital-gains tax – for decades
Now the power of compound interest becomes apparent. Say you invest £2,880 every year until the child’s 18th birthday – a total investment of £51,840. An annual investment return of 6% after charges will turn that into £1.8m by the time the beneficiary turns 55. Taking inflation into account (at an assumed 2.5% a year), that pot would still be worth £356,000 in today’s money. That will buy an index-linked annuity of around £15,500 a year, and means that even if the child never sets up their own pension, they’ll still be far from the breadline at retirement
And if that isn’t attractive enough, then remember that the £2,880 annual investment falls under the annual inheritance tax (IHT) gift limit. So the money isn’t liable for inheritance tax even if the person who gifts it dies within seven years of making it. So it’s also a neat way of potentially saving your heirs 40% in IHT
Sadly, there is a catch. Locking your money up for 50 years or more isn’t without risk. Over that time we could have ten different governments. Each will bring its own ideas in on pension rules and tax breaks. As such, the current pension system is unlikely to look the same in 50 years’ time as it does now. So don’t pile too much cash into pensions your children can’t touch until they retire. Keep some cash – at least three to six months’ salary – for emergencies. And make sure your own pension is well funded before helping your grandchildren
Other ways of helping
Junior ISAs – Junior individual savings accounts – known as Jisas – were launched in 2011 as a tax-free way for parents, relatives and family friends to save regularly for children under the age of 18. Up to £9,000 each year in total can be invested in a Jisa on the behalf of children – in a cash account, or in shares and funds – or in a mixture of the two. As with adult Isas, savings in a Jisa do not incur tax on interest or capital gains, and dividends from shares can be reinvested with no further tax to pay
At the age of 16, the child can take over the management of the Isa and at age 18, the Jisa will automatically rollover into an adult Isa, allowing the child full access without parental consent. This does of course raise the concern that rather than, for example, using the money to fund university or for a deposit on a house, the money can be ‘blown’ on fast cars and holidays
If you’re in the enviable position of being able to invest the £9,000 maximum for 18 years, the child would have £290,000 by the time they were able to access it – again assuming annual investment returns of six per cent.
Tax Exempt Savings Plan (TESP) – Another way to build up a tax-free lump sum is by investing in a TESP. TESPs are offered by Friendly Societies and give you a tax-efficient way of maximising your savings, receiving a lump sum at the end of the term. As you have a tax free savings allowance (up to £25 per month) in addition to your Individual Savings Account (ISA) and Junior ISA allowance, Child TESPs can be used alongside Junior ISAs.
The conditions of each TESP vary according to provider, but common features include:
– Stock market-based investment
– No Capital Gains and Income Tax
– The option to choose the length of your term (though there may be a minimum or maximum limit)
– A maximum and/or minimum limit on how much can be saved per month (e.g. £15-£25)
– Guaranteed minimum assured lump sum
Children’s Savings Accounts – It’s definitely worth thinking about starting a savings account yourself for your grandchildren, it also makes sense tax-wise
For tax purposes, the government views a child as an independent person who is entitled to a personal allowance of £12,570 just like any adult. The vast majority of children don’t earn above the personal allowance so therefore their savings are tax-free (as long as their parents fill in a R85). To prevent parents from simply dumping their savings into your grandchild’s account, the taxman limits the amount of tax-free interest their gifts can earn. However…. and this is the nifty bit for grandparents, the limit doesn’t apply if the gift comes from anyone but the parents/guardians. This means that if you want to deposit a ‘gift’ into your grandchild’s account, it does not affect your or your grandchild’s taxable allowances, as long as the total amount of interest falls within the £8,105 allowance
Unit Trusts and Investment Trusts – Your grandchild can’t hold a unit trust or investment trust until they reach the age of 18, but an adult can open one and add the child’s initials to the account holder name. To make a legally binding investment for a child there may need to be a proper trust document drawn up. Most unit trusts and Oeics allow units to be designated for children which means the income will be treated as the child’s and the assets transferred to the child at 18. Some unit trusts companies allow units to be registered for children aged 14 and above