How can grandparents help?
Children, like adults, have a personal tax allowance, which is £9,440 for the tax year 2013/2014. This means they can earn that amount - for example in interest from savings - without paying any tax.
When a parent saves for their child and the money they give their child earns more than £100 interest a year, this interest will be taxed as if it were their own. If the funds originated from someone other than a parent or are insufficient to generate £100 interest parents should ask for Form R85 when opening an account for their child to ensure that the account is registered to receive gross interest.
These rules don't apply to grandparents. You can put aside as much as you like for your grandchildren, and so long as the total income is less than their tax-free allowance, they won't pay any tax.
Your grandchild might be small now - but soon enough they'll be ready to face the world.
How can you save?
There are lots of different ways you could save or invest for your grandchildren. Here are a few.
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Child Trust Funds and Junior ISAs
If your grandchild has a Child Trust Fund or Junior ISA, you can pay into it. From the tax year 2013/2014 the most that can be invested is £3,720 per year for Child Trust Funds and Junior ISAs. But remember, the returns from these accounts are always tax free, even if the money is paid in by parents, which means that the returns do not affect the child's personal allowance. If the child's parents can put the maximum amount in, you might think about putting your money elsewhere.
Note: At the current time HSBC does not offer a Junior ISA.
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Regular savings accounts
If you plan to put money away little and often, rather than all at once, these accounts could be a worthwhile option. They often offer a better rate of interest than other accounts, but they usually have very strict limits on when you can withdraw money, and on how much you can pay in each month. Find out about the HSBC Regular Saver.
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National Savings (NS&I)
NS&I Children's Bonds allow you to invest for a child's future in their own name - and there's no tax to pay on the interest. Premium Bonds can be a popular choice as a baby gift - just in case a future windfall comes your grandchild's way!
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Child Tax Exempt Savings Plans (TESPs)
Another way to save for your grandchild can be through a TESP which are offered by Friendly Societies. Contributions to these can be in addition to holding a child trust fund or Junior ISA. TESPs do require you to invest monies for longer periods of time, usually a minimum of 10 years, and returns are not guaranteed.
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Funds and other investments
When you invest in funds, stocks or investment bonds, you can put aside as much money as you like. However, you're not usually guaranteed a return. The returns could be high, but you could also end up with less than you initially invested. Some people prefer to spread their money, putting part in riskier investments and part in less risky savings accounts. Investments should be seen as a longer-term commitment - usually at least 5 years.
Reasons to save
"All young people need access to capital, so starting a savings account for your grandchild as soon as you can is a great idea and will really give them a helping hand in life," says the Open University's Dr Rajiv Prabhakar.
You might want to contribute towards your grandchild's education or help them get on the housing ladder. If so, here are a few figures to think about.
- Higher education: From 2012/13 universities can charge up to £9,000 a year in tuition fees.
- Buying a house: The average price of a house in England and Wales is just under £162,080 (Land Registry, December 2012), so a first time buyer needs around £32,416 to put down a 20% deposit.
- Getting married: According to the latest information from CompareWedding Insurance.org.uk couples are spending, on average, £14,441 on getting married in 2012 compared to £15,541 the previous year.
The value of investments (and any income received from them) can fall as well as rise and you may not get back what you invested. For some investments this can also happen as a result of exchange rate fluctuations as shares and funds may have an exposure to overseas markets. Investments normally need a commitment of at least five years. Any money held within a Child Trust Fund or a Junior ISA may not be accessed until the child turns 18. Please be aware that the value of tax benefits will depend on your individual circumstances, and tax rules may change in the future.
