Saving for the Grandkids
Q: "My husband has recently passed away, leaving me a lump sum of £200,000 from his life insurance. I have two grandchildren aged 13 and 15, and I'd like to leave them £50,000 each for their 18th birthdays. I'm very cautious, so I don't want to invest the money, but want the best return I can get from a savings account."
A: If you're risk-averse when it comes to your money but you don't need access to it, you should take advantage of the higher rates available on fixed-term bonds.
However, remember that interest rates may rise in the future, so it's probably best not to commit for longer than about three years.
Keep a maximum of £50,000 with one institution or banking group. That way, if the bank gets into difficulties, the money will be fully covered by the Financial Services Compensation Scheme (FSCS). This limit will increase on 31 December to the sterling equivalent of €100,000.
You could hold the money in a bare trust on your grandchildrens' behalf until they reach 18. You can do this very simply with a designated account in your name but followed by the child's initials in brackets.
This means interest is taxed as the child's – they have the same tax-free allowance threshold (£6,475 in 2010/11) as the rest of us. If the money isn't in a bare trust, as a taxpayer, you will be liable to tax on the interest.
Francis Klonowski, independent financial adviser at Klonowski & Co in Leeds, suggests a three-year bond in the grandchild's name.
"I recommend the Cheshire Building Society three-year bond with a fixed rate of 3.95% over the whole term. You can deposit as little as £100, the term suits your timescale, and you can make further investments as you go along. I also like the Northern Rock three-year fixed-rate bond, paying 3.8%."
Patrick Connolly, certified financial planner at AWD Chase de Vere, recommends a two-year bond held in your name.
"I recommend the Santander two-year fixed-rate bond. You retain complete discretion over when you pass the funds to your grandchildren, and the interest rate of 3.55% AER is competitive. Another option is the Bank of Scotland's two-year fixed-term bond, paying 3.15% on deposits from £500."
Generally thought of as being interchangeable with life assurance, but isn’t. Life insurance insures you for a specific period of time, at a premium fixed by your age, health and the amount the life is insured for. If you die while the policy is in force, the insurance company pays the claim. However, if you survive to the end of the term or cease paying the premiums, the policy is finished and has no remaining value whatsoever as it only has any value if you have a claim. For this reason, life insurance is much cheaper than life assurance (also called whole of life).
The Financial Services Compensation Scheme is the compensation fund of last resort for customers of authorised financial services firms. If a firm becomes insolvent or ceases trading, the FSCS may be able to pay compensation to its customers. Limits apply to how much compensation the FSCS is able to pay, and those limits vary between different types of financial products. However, to qualify for compensation, the firm you were dealing with must be authorised by the Financial Services Authority (FSA).
This is a mutual organisation owned by its members and not by shareholders. These societies offer a range of financial services but have historically concentrated on taking deposits from savers and lending the money to borrowers as mortgages, hence the name. In the mid-1990s many societies “demutualised” and became banks. One academic study (Heffernan, 2003) found demutualised societies’ pricing on deposits and mortgages was more favourable to shareholders than to customers, with the remaining mutual building societies offering consistently better rates. In 1900, there were 2,286 building societies in the UK; in 2011, there are just 51.
Where APR is the rate charged for money borrowed, Annual equivalent rate is how interest is calculated on money saved. The AER takes into account the frequency the product pays interest and how that interest compounds. So, if two savings products pay the same rate of interest but one pays interest more frequently, that account compounds the interest more frequently and will have a higher AER.