Cash, shares, child trust funds... What's the best way to invest for grandkids?

A little put away now can grow into a lot in the future. Chiara Cavaglieri and Julian Knight report

Everywhere grandparents turn, it seems, they are being told that the financial future of their grandchildren is uncertain.

They face rising university fees, house prices out of reach, minuscule interest on savings and shrinking pension provision. All in all, growing up and moving through adult life has never been so expensive – no wonder grandparents want to give a helping hand through savings and investments.

According to Saga, 1.8 million grandparents are currently putting money aside for their grandchildren. But in a low-interest rate environment and with investment returns patchy at best, what options are available for grandparents looking to give their loved ones a head start in life?

Savings accounts

Savings for children are not automatically exempt from tax, and children, just like adults, have an annual personal allowance. For this year, that allowance is £6,475 but most children are unlikely to reach that limit, so parents can fill out an R85 form to ensure that interest is paid gross – without the automatic tax deduction.

Several specialist children's savings products are available. Halifax pays 6 per cent on its Children's Regular Saver, fixed for one year, but deposits must be at least £10 and no more than £100 per month. Also, withdrawals or missed payments will result in the interest falling to just 1.05 per cent.

Grandparents wanting to lock away a lump sum can opt for a bond for a fixed rate of interest over anything from six months to five years. Generally, a more restrictive account will attract higher rates of interest.

National Savings' Children's Bonus Bonds are another option and can be opened by any adult for a child under the age of 16. A lump sum of up to £3,000 can be added per issue, in £25 instalments. For five years, the bond earns a fixed rate of interest, after which there is a guaranteed bonus and the parent, who controls the bond until the child reaches 16, can decide whether to cash it in or leave it invested. All interest and bonuses are exempt from tax.

Child Trust Funds

Children born after 1 September 2002 will already have a child trust fund (CTF) set up in their name. Grandparents, as well as any other relatives or friends, can jointly contribute up to £1,200 into a child's CTF each year, and any interest is tax free. "As a concept child trust funds tick a lot of boxes; they're tax efficient, relatively uncomplicated, and can accept regular savings or smaller lump sums," says Dennis Hall, the managing director of Yellowtail Financial Planning.

Cash CTFs operate as a standard savings account, with no real risk and a steady, if minimal growth. The amount a child would receive from a shares and stakeholder account is dependent on the performance on shares and bonds. Most financial advisers are hesitant to recommend cash over the full 18-year period, as stakeholder accounts are expected to withstand any stock market volatilities and offer much better returns over such a long period of time.

For grandparents wary of the risky nature of a non-cash fund, stakeholder accounts do offer some protection. Importantly, the money in the account will be moved out of shares into safer cash investments, a process known as lifestyling, once the child turns 13.

But CTFs are not without their drawbacks. "The child gets control of the fund at age 18, university fees or longer-term savings may not be a high priority," says Mr Hall.

Share based investments

Many grandparents will be hoping to help their grandchildren at a later stage in life, typically when they reach university age. Those with time on their side should consider share-based investments.

Shares cannot legally be owned by under 18s but grandparents can save on their behalf and identify their grandchild as a beneficiary, or hold the investment in trust for the child until they reach adulthood. Grandparents can pick individual shares or go for investment trusts and unit trusts which pool money from other investors to buy shares in different companies.

"These are an ideal form of savings for the long term. Most provide the option of regular monthly saving and they're tax efficient because any profit is offset against the child's capital gains tax allowance – which is £10,100 this year," says Philip Pearson, a partner at advisors P&P Invest.

When parents are investing on their children's behalf, any income over £100 will be taxed at the parent's tax rate, but this does not apply to money given by grandparents. However, there may be inheritance tax issues.

Stakeholder pensions

Grandparents can also set up a stakeholder pension and invest up to £2,880 a year on behalf of a child. The Government tops up the contribution with tax relief. "The extremely long investment timescale means there is great potential for high levels of growth created by compounding over many years," says Gordon Bowden, the director of advisers Quainton Hills. However, stakeholders are very inflexible. There is also the danger that pension rules will change dramatically over the years.

Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at VouchedFor.co.uk

Voices
voices
News
general electionThis quiz matches undecided voters with the best party for them
Arts and Entertainment
Keira Knightley and Matthew Macfadyen starred in the big screen adaptation of Austen's novel in 2005
tvStar says studios are forcing actors to get buff for period roles
News
Prince William and his wife Catherine, Duchess of Cambridge show their newly-born daughter, their second child, to the media outside the Lindo Wing at St Mary's Hospital in central London, on 2 May 2015.
news
Finacial products from our partners
Property search
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Ashdown Group: Trainee Consultant - Surrey/ South West London

    £22000 per annum + pension,bonus,career progression: Ashdown Group: An establi...

    Ashdown Group: Trainee Consultant - Surrey / South West London

    £22000 per annum + pension,bonus,career progression: Ashdown Group: An establi...

    Recruitment Genius: Claims Administrator

    £16000 - £18500 per annum: Recruitment Genius: This is an excellent opportunit...

    Recruitment Genius: Senior SEO Executive

    £24000 - £28000 per annum: Recruitment Genius: A Senior SEO Executive is requi...

    Day In a Page

    Fishing for votes with Nigel Farage: The Ukip leader shows how he can work an audience as he casts his line to the disaffected of Grimsby

    Fishing is on Nigel Farage's mind

    Ukip leader casts a line to the disaffected
    Who is bombing whom in the Middle East? It's amazing they don't all hit each other

    Who is bombing whom in the Middle East?

    Robert Fisk untangles the countries and factions
    China's influence on fashion: At the top of the game both creatively and commercially

    China's influence on fashion

    At the top of the game both creatively and commercially
    Lord O’Donnell: Former cabinet secretary on the election and life away from the levers of power

    The man known as GOD has a reputation for getting the job done

    Lord O'Donnell's three principles of rule
    Rainbow shades: It's all bright on the night

    Rainbow shades

    It's all bright on the night
    'It was first time I had ever tasted chocolate. I kept a piece, and when Amsterdam was liberated, I gave it to the first Allied soldier I saw'

    Bread from heaven

    Dutch survivors thank RAF for World War II drop that saved millions
    Britain will be 'run for the wealthy and powerful' if Tories retain power - Labour

    How 'the Axe' helped Labour

    UK will be 'run for the wealthy and powerful' if Tories retain power
    Rare and exclusive video shows the horrific price paid by activists for challenging the rule of jihadist extremists in Syria

    The price to be paid for challenging the rule of extremists

    A revolution now 'consuming its own children'
    Welcome to the world of Megagames

    Welcome to the world of Megagames

    300 players take part in Watch the Skies! board game in London
    'Nymphomaniac' actress reveals what it was really like to star in one of the most explicit films ever

    Charlotte Gainsbourg on 'Nymphomaniac'

    Starring in one of the most explicit films ever
    Robert Fisk in Abu Dhabi: The Emirates' out-of-sight migrant workers helping to build the dream projects of its rulers

    Robert Fisk in Abu Dhabi

    The Emirates' out-of-sight migrant workers helping to build the dream projects of its rulers
    Vince Cable interview: Charging fees for employment tribunals was 'a very bad move'

    Vince Cable exclusive interview

    Charging fees for employment tribunals was 'a very bad move'
    Iwan Rheon interview: Game of Thrones star returns to his Welsh roots to record debut album

    Iwan Rheon is returning to his Welsh roots

    Rheon is best known for his role as the Bastard of Bolton. It's gruelling playing a sadistic torturer, he tells Craig McLean, but it hasn't stopped him recording an album of Welsh psychedelia
    Morne Hardenberg interview: Cameraman for BBC's upcoming show Shark on filming the ocean's most dangerous predator

    It's time for my close-up

    Meet the man who films great whites for a living
    Increasing numbers of homeless people in America keep their mobile phones on the streets

    Homeless people keep mobile phones

    A homeless person with a smartphone is a common sight in the US. And that's creating a network where the 'hobo' community can share information - and fight stigma - like never before