As a grandparent, it’s natural to want to provide the best for your grandkids. After all, they will grow up in a world full of financial hurdles – whether it’s managing their student debt, getting a foot on an increasingly expensive property ladder, or paying for a wedding.
How grandparents can help
Many people think that children don’t pay tax – but actually, that’s not true.
Children have a personal tax allowance, just like adults. In fact the tax allowance is exactly the same for both adults and children (£8,105 for 2012/13).
This means they can earn that amount in a year without having to pay tax.
But if you want to save for your grandkids, as a grandparent you have an advantage over parents.
When a parent saves for their child and the money they give them earns over £100 a year in interest, the whole lot gets taxed at the parent’s rate of tax.
However this rule doesn’t apply to grandparents. You can put aside as much as you like for your grandchildren – as long as the income doesn’t go over the tax allowance, your grandchildren won’t pay any tax on the money you put aside for them.
There are a number of ways that you, as grandparents, can help ensure that your grandchildren’s savings are shielded from tax (complete legally of course!).
By saving now you can give them a real headstart in life
How can I help save for my grandchildren?
Below are the main savings options for those looking to put a little something away for their grandkids:
A Junior ISA allows you to save or invest up to £3,600 per tax year on behalf of your grandchild – and just like adult ISAs, Junior ISAs are tax-free savings accounts.
So any money you put into a Junior ISA does not use up any of your grandchild’s annual tax-free allowance.
(Think of an ISA as being like a bag. Any money you put in the ISA ‘bag’ is protected from tax – so when you earn interest on your savings, you don’t lose any of it to the tax man.)
With a bit of time, Junior ISAs can grow into an impressive nest egg. For example, if you saved £250 a month in a Junior ISA paying 3.25%, your grandchild would have a savings pot worth over £70,000 by the time they turn 18!
See our full guide to Junior ISAs.
Save up to: £3,600 per tax year. (From 6 April 2013, you can save up to £3,720 per tax year.)
Available to: Children under 18.
Benefits: Tax-efficient, and you can put in as much or as little money as you wish (as long as it’s under £3,600 a year).
Drawbacks: Money can’t be withdrawn until your grandchild is 18, and many children don’t receive enough money to be liable for tax.
National Savings (NS&I) Children’s Bonds
Children’s Bonds are a tax-free way to save for your grandchild’s future, and offer a guaranteed rate of interest for five years. You or the parents can invest up to £3,000 for every child (Children’s Bonds are only available to children aged 16 or under).
They are a good ‘safe haven’ option, and you know exactly what interest rate you’re getting for the next few years. However the current interest rate of 2.5% offered by Children’s Bonds is below that offered by many banks.
The NS&I website has a useful Children’s Bond interest calculator so you can work out how much your money would earn for your grandchild.
Save up to: £3,000 per child.
Available to: Children up to 16.
Benefits: Tax-free. You know exactly what you’re getting because the interest rate is fixed (you’re guaranteed an interest rate of 2.5% for five years at present).
Drawbacks: You need to keep your cash in them for quite a while to benefit. The current interest rate of 2.5% is below that offered by many banks (not just in regular savings accounts but some easy access accounts, too). The modest interest offered means that your savings might not keep up with rising costs.
‘Regular Savings’ Accounts
If you want to put a little bit of money away each month, then Regular Savings Accounts can be an option worth considering.
They offer impressive interest rates (between 4%-8% at the moment) but there are downsides:
- They tend to have quite strict terms and conditions (such as limiting the amount of withdrawals you can make, and forcing you to deposit a minimum amount each month).
- Regular Savings Accounts typically only last a year – after that, your cash usually gets put into a bog-standard low interest account. So make sure you note the date the account ends, and move your money to a better deal after that date.
- Although the interest rates are attractive, bear in mind that you only receive interest on the money you deposit monthly – you don’t earn interest on the lump sum.
Example: Say you have Regular Savings Account paying 10% interest. You save £3,000 over one year by paying in £250 a month. 10% interest on £3,000 = £300. Right?
Make sure you understand how much interest you’ll get with a Regular Savings Account
Wrong – because you don’t pay in your £3,000 as a lump sum (i.e all at once). You only earn interest on the money currently in the account. So in the first month you would earn 10% on £250. The second month you would earn 10% on £500. And so on. So in this case, 10% interest on £3,000 = around £150 come the end of the year.
The general rule with Regular Savings Accounts: the amount of interest you receive will be about half the interest rate of the account.
Save up to: Maximum amount varies amongst different providers – normally between £1,200 – £3,600.
Available to: Varies between providers – typically, children up to 16 are eligible.
Benefits: They tend to pay out a decent rate of interest.
Drawbacks: Strict terms and conditions and you have to make a minimum deposit each month. Most accounts only offer high interest for 12 months, so make sure you switch your money after that period.
‘Easy Access’ Accounts
As their name implies, these are accounts where you can withdraw or deposit cash whenever you need it. However savings rates on these types of accounts are variable, so keep an eye on the interest rate – if it plummets, move your cash!
Keep an eye on ‘Easy Access’ account interest rates
Save up to: Varies. Some accounts have no limits on the amount you can save.
Available to: The maximum age for many accounts is 16, though some go up to 18.
Benefits: Easy access to your money whenever you or your grandchild wants it.
Drawbacks: You can probably get a better rate of interest with other types of children’s accounts.
Life’s big milestones – getting an education, buying a house, getting married – tend to carry big price tags.
- Education: University tuition fees are currently set at £9,000 a year – and that doesn’t include the cost of living
- Property: The average house price is just over £249,000 right now, so a first-time buyer would need to rustle up £49,800 for a basic 20% deposit
- Marriage: The average cost of a wedding now stands at over £21,000
If you can afford to put some money aside for your grandchildren (not everyone can, of course), then you can help them reach their life goals – whatever they might be.