Giving a grandchild a five-figure sum on their 18th birthday seems out of reach for most people. But smart grandparents who regularly save a small amount of money in a child’s Junior Isa can easily achieve this goal. Not only will this help give grandchildren a solid financial footing, it can also reduce grandparents’ tax bills.
Junior ISAs are savings and investment accounts designed to make putting money aside as easy and lucrative as possible for those under the age of 18.
All the money saved can grow completely tax-free – so no tax on savings interest, investment returns or income. They are almost identical to Isas available for adults, except the annual limit is £9,000 instead of £20,000.
While a Junior Isa can only be set up by a parent or guardian, grandparents – as well as friends and other relatives – can drop in whenever they want, without sacrificing their own personal Isa allowance.
If a grandparent contributes £20 per month from the birth of a grandchild, they will have built up a nest egg worth more than £7,000 by the child’s 18th birthday. The calculations assume an investment growth of five percent after deducting costs. If they put away £100 a month, the pot would be worth almost £35,500 by the time the child turns 18. This can be an invaluable contribution to college or university, travel plans, or even a down payment on a first home.
Good Habits: Putting money into a Junior Isa can help children learn the value of saving
Laura Suter, head of personal finance at wealth platform AJ Bell, says: ‘For grandparents with more money to spend, putting away the full £9,000 Junior Isa allowance each year from birth will result in a pot worth almost £266,000 on their 18th birthday.’
Grandparents with older grandchildren can still create a healthy piggy bank by saving regularly. A grandparent who starts contributing £100 a month for a five-year-old grandchild can hand over a bill worth just over £22,000 once the child turns 18.
As the cost of living depresses household income, it becomes increasingly difficult for parents to save for their children. Grandparents may also be dealing with the same budgetary pressures, but those who can afford it find that their contributions are especially welcome.
Sarah Coles, head of personal finance at wealth platform Hargreaves Lansdown, says: ‘It can be difficult even to think about saving for your child’s future when money is so tight – especially at the moment – but sometimes the Bank of Gran and Grandad do that. come to the rescue.’
Buy college money…instead of toys
Bertie Hale’s four grandparents all contribute to his Junior Isa each year – even though Bertie is only 17 months old, it may take him a while to appreciate it. His parents, Josh and Natalie Hale, from Stroud, Gloucestershire, opened a Junior Isa for Bertie – whose full name is Hubert after one of his great-grandparents – just after he was born. Josh says, “I wanted a tax-advantaged, long-term savings car for Bertie that will hopefully help him deal with whatever life may be like when he turns 18, whether it be college, travel, housing, or spaceflight!”
He adds: “We also wanted to encourage our relatives to give money that would be useful to him later, instead of buying him plastic toys, especially when he is still at an age where he has no idea who got him datum. What.’ Josh chose sustainable investments from the fund group Liontrust, accessible through Hargreaves Lansdown. “Hopefully the money will be well spent,” he says.
Josh and Natalie occasionally supplement Bertie’s Junior Isas, and Bertie’s four grandparents deposit his Christmas and birthday gift money directly into his account.
At the same time, reduce the estate tax
Starting a piggy bank for a grandchild can also be a great way for grandparents to reduce estate taxes.
Grandparents can give a total of up to £3,000 each tax year without risking inheritance tax. They can also donate more than this amount without being subject to inheritance tax, as long as they live for at least seven years after the donation.
Some grandparents may also be able to take advantage of a little-known inheritance tax deduction that allows you to make a regular gift out of your income, as long as it doesn’t affect your quality of life.
Wise: Josh Hale opened a Junior Isa for his son Bertie, one
Inheritance tax is only due if your estate is worth more than £325,000 – £650,000 for a couple who are married or in a civil partnership. Couples can pass on assets of up to £1 million tax-free when they leave a family home.
What are they going to spend it on?
Once the child turns 16, the money invested in their Junior Isa becomes their property, although they cannot withdraw it until they are 18. At this point, parents and grandparents have no control over how the teen spends. However, by showing them the value of saving or investing, they can hopefully continue this habit throughout their adult lives.
Myron Jobson, senior personal finance analyst at investment platform Interactive Investor, says, “Keep in mind that you may have reserved the Junior Isa to fund college education or a home deposit, but they may prefer to spend it on a vacation to Las Vegas.” and a flashy car.’
Surcharge loophole if you are a rich teenager
An unusual quirk allows 16 and 17 year olds to contribute to both a Junior Isa and an adult Isa. That’s because Junior Isas can be paid up to the age of 18, while Adult Isas can be opened by anyone 16 and older. That means their total annual stipend is a massive £29,000.
In reality, few people of this age have this kind of amount.
If you’re feeling really generous…
Grandparents can also contribute to a child’s retirement so they grow older too. You can pay up to £2,880 a year and this is topped up by the government to £3,600 in tax relief.
However, the money is put away until the child reaches the age of 57. If a grandparent were to pay £100 a month for a grandchild’s pension from birth to age 18, by the time the grandchild turns 57, it could be worth about £1. 244,000.
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