Should I invest in my grandchildren's pensions?

22 January 2020

A grandmother asks how to help her grandkids’ cash grow once their Junior ISA allowance has hit its limit

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I give £250 on birthdays and at Christmas to each of my six grandchildren. For four of them, I invest in Junior ISAs. However, the other two – aged 10 and 14 – already have fully funded Junior ISAs and Premium Bonds. Their parents have asked me to invest in their pensions, but this doesn’t appeal to me because of the timeframe.

Can you suggest other savings products where I can make small, twice-yearly investments?

Initial diagnosis

Adrian Lowcock, head of personal finance at Willis Owen, believes you need to discuss with their parents why they want you to invest in pensions.

“Most likely it is because they have already put plans in place to ensure their children have money when they turn 18,” he says.

He points out that SIPPs (Self Invested Personal Pensions) can be excellent long-term planning vehicles and make fantastic gifts.

“Knowing your grandchildren will have a good start to their retirement plans could help them become financially free and live the life they want – rather than one they have to,” he adds.

Pension savings for children benefit from initial tax relief for gross contributions up to £3,600 each year, says Patrick Connolly, a chartered financial planner at Chase de Vere.

“If you are planning to save £500 each year, with 20% tax relief, it means they will have £625 invested into their pension,” he explains.

However, he shares your concerns about them not being able to access any of it until they are comfortably into their 50s.

“Pensions for children are only usually suitable if sufficient other savings are already in place,” he adds.

The bad news is there is not a huge number of options open to you, according to Darius McDermott, managing director of Chelsea Financial Services.

“NS&I Children’s Bonds are not available to new customers, so you may need to consider investing outside a tax wrapper for the children,” he says.

Treatment plan

McDermott suggests you could consider a designated account.

“This will allow you to invest into collective funds and earmark the funds for the children,” he explains.

He points out funds in these accounts are not held by the child, but are solely owned by the parent or grandparent. They just effectively give stock market access to those under the age of 18.

“The downside is there are no tax benefits – income and gains are taxed at the marginal rate as they are owned by the account holder,” he says. “There is also no inheritance tax exemption.”

An alternative is holding the investments in a bare trust.

“You will be making all the decisions about where to invest the contributions, but the account will be in the child’s name,” he adds. “Once they reach 18, you lose control over how they use it.”

Connolly highlights the  tax efficiency of bare trusts.

“The tax from income or gains on assets held in a bare trust fall on your grandchildren and they are able to use their annual income tax and capital gains tax allowances,” he explains.

Alternative treatment plan

You should not overlook conventional savings accounts, according to Martin Bamford, a chartered financial planner at Informed Choice.

“There will be no interest to pay as this will be taxed on the child who will have their tax-free allowance in place,” he says.

He points out the so-called £100 rule, which means interest on savings contributed by a parent is taxed at the parent’s tax rate, does not apply when the money is gifted by a grandparent.

As with adults, children have a personal allowance for income tax – £12,500 for the tax year 2019-20 – so the vast majority will not need to pay tax on the interest they earn.

The best children’s savings accounts are currently offering interest rates of 3%, according to Moneyfacts.

Such accounts will also help educate your grandchildren about saving and the importance of compound interest.

However, it’s worth bearing in mind that money in cash savings is unlikely to be the most profitable way to save for the longer term, especially with interest rates at such low levels.

Of course, if your grandchildren already have plenty of savings and investments then maybe consider something else, suggests Lowcock.

“If they are old enough talk to them and ask what they would like to do,” he adds.

“This could be going on a trip or buying them some educational toys.”

First published on 18 February 2020

Sipps & Grandchildren

It is my understanding that my Sipp balance can be divided up between my children and grandchildren when I die. There will be no tax deductions provided it goes from Sipp to Sipp. This way I can invest one portfolio rather than manage five, and my Will can define how to apportion the balance.

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