Save early for your grandchildren & reap big rewardsPosted on: 09 March 2010 by Mark O'haire
If you’re thinking of giving financial assistance to your grandchildren when they’re older, why not start planning it now rather than leaving them a legacy in your Will?
Saving early can reap rewards. First, the longer funds are invested, generally the higher the return. Second, you and your grandchild could benefit from using the various tax allowances available. And these could mount up over a number of years.
Whatever the reason for providing funds – a deposit for a house, university costs or even planning to provide for a pension, you could help build a significant sum for your grandchild when they reach adulthood.
There are a number of options available - depending on the timescale and what type of investments you want to include. For the cautious, there are tax-efficient savings in the form of cash-based child trust funds, National Savings Certificates, various children’s deposit accounts and from age 16, cash ISAs.
Those happy to use investments which include exposure to the stockmarket, corporate bonds and commercial property will have a much wider choice and the possibility of much greater returns than cash over the long term.
While there is an element of risk attached to them, with timescales of 10 - 20 years the potential for growth is much higher – and this can lower the chances of the investment value being reduced by inflation.
Investments can be held in a bare trust for the child so that any income and gains are assessed on the child’s tax rates. If the child is a non or basic rate taxpayer, this could be advantageous. You would also benefit by removing income from your own assessment - handy if you’re are a higher rate taxpayer or nearing the personal age allowance threshold.
For those concerned about giving a child access to significant amounts of money at 18, options exist to place funds in trust where the funds can be distributed by trustees according to your express wishes.
Investing in a pension may seem extreme but the tax advantages do make it quite attractive. For example, you can invest £2,880 per year into a stakeholder pension for a child (no age restriction) and the government will pay tax relief of £720 into it as well. That’s a 25% increase in your investment from the outset. In addition, there’s no capital gains tax on funds held within a pension and the child can continue saving into it when they start work.
With big question marks over the provision of the state retirement pension and more emphasis on personal pension provision, this type of gifting could make a huge difference to a child’s retirement and give them a great start in building up a retirement fund.
By Ruth Dolan - chartered financial planner at Furley Page Solicitors
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