From pension pots to bonds, how can you give your grandchildren a head start?
For growing numbers of British families, there’s no one quite like grandma (or grandpa) for help with everything from babysitting to household chores.
Soaring childcare costs and long working hours mean that 7m grandparents now look after their grandchildren and help around the home while mums and dads work, according to insurer Aviva.
But a grandparent’s work is never done. Fearful for little Freddie or Fiona’s financial futures, many are also stashing away cash on their behalf – hoping to build up a nest egg for their grandchildren in future. It’s easy to understand why. As the cost of a university education now tops £63,000 and first homes are impossible to buy without a hefty deposit, any financial help offered can go a long way.
But the list of products on offer can leave even the savviest grandparent flummoxed. What on earth is a JISA? Do simple savings accounts pay a decent rate of interest? How does a Children’s Bonus Bond work?
The stock market has been highly volatile in recent years but if you want to grow your fund quickly an investment fund is regarded by financial experts as the best option. The recent financial turmoil might mean that you’re even able to find bargains – especially if you’re investing over a longer time-frame.
There are a number of investment funds targeted at children, but it is key that you consider the best performing plans – even if they’re targeted at adults. You can open the plan yourself and then add the child’s initials to the account holder designating it for them in future. This gives you control over when your grandchildren can access the cash.
Every penny counts, so make sure you look out for products offering invaluable tax breaks. The very new and tax-efficient kid on the block is the Junior Individual Savings Account (JISA).
Introduced in November as a replacement for the Child Trust Fund, any child under the age of 18 who is a resident in Britain and does not already have a Child Trust Fund is eligible for a JISA. Just like an adult ISA it allows friends and family members to save up to £3,600 tax free in cash, stocks or investment funds over each year running from April 6 to April 5.
Use JISA allowances to their full potential and you can build up a sizeable stash for your grandchildren. For example, a child born this year who used their JISA allowance up every year until 2029 would see their savings swell to more than £120,000 – with an annual growth rate of 4 per cent.
Other tax breaks
Another tax efficient long-term savings option is the government-backed Children’s Bonus Bond from National Savings and Investments. This allows anyone over the age of 16 to squirrel away up to £3,000 tax free for any child under 16 with a minimum investment of £25. The bonds – designed to be held over a five-year period – pay an annual rate of interest of 2.5 per cent and include a bonus at the end of the fifth year.
Most banks and building societies offer savings account targeted at youngsters which, in many cases, you can open on behalf of your grandchildren. Grandparents can be particularly helpful in this situation.
If a child generates more than £100 interest in a year from money given by a parent, this income is taxed at that parent’s rate – either at 20, 40, or 50 per cent.
However, grandparents can give as much as they like and it will be exempt of the £100 limit on interest earned. Making cash gifts is an excellent way of aiding your child’s future. HM Revenue and Customs allows you to gift £3,000 every year to an individual. Assuming average compound growth of 6 per cent a year, this should be worth over £400,000 by the time the child reaches age the age of 38, if you give £3,000 each year.
Retirement might be more than 60 years away for your grandchild, so starting up a pension fund while they are in nappies may seem like madness. But your actions could give your grandchildren a vital head start.
You can put away a maximum of £2,880 on behalf of a child each year. The government will add £720 in tax relief, boosting the value to £3,600. The investments then grow free from income and capital gains tax. Bear in mind that this type of saving is very unflexible. Your grandchild won’t able to touch the pension before the age of 55.
The decision to change how the state pension is increased will have a far-reaching impact. Everyone should oppose it, says Roger Turner
Until 2016, increases in the basic state pension and SERPS were linked to the September retail prices index (RPI). Few people had heard of the consumer prices index (CPI).
Then, out of the blue, without consultation, the government announced that it would be using the CPI as the measure for increases in state benefits from April 2016.
Many occupational pensioners in the public and private sectors have also been affected.
Does it matter which index is used? Yes, very much so. The RPI is normally about 0.5 to 1.0 per cent more than the CPI, so under RPI pensions would increase more quickly.
The effect of this in any one year may be small but compounded over several years the difference is significant.
For example, with the RPI at 4 per cent and CPI at 3 per cent, someone with a pension of £120 a week would be £1,560 a year (£30 a week) worse off after ten years.
After 20 years, they would be £4,160 a year (£88 a week) worse off. Even if RPI is at 2.5 per cent and CPI at 2 per cent the difference is over £600 a year after ten years.
With about one third of pensioners relying only on their state pensions, the switch from RPI to CPI will be a massive blow.
Coming at a time of rapidly increasing fuel and food costs, it will cause real difficulty for the most vulnerable in our society.
Even for people with defined contribution occupational pensions – where their contributions grow each year and the resulting pot is used to buy an annuity – there are difficulties ahead. Six months ago £100,000 would have purchased a flat rate annuity with no indexation (that is, no rise in line with inflation) or survivor benefit of about £7,000.
Today, due to low interest rates and other economic factors, the same amount will buy only £6,000 – a 14 per cent reduction for the whole of someone’s retired life. Add indexation and survivor benefits and the annuity rate could drop to £3,000.
NFOP has joined with several other pensioner organisations and trade unions to challenge the secretary of state’s decision to switch to the CPI measure in a judicial review. A judgement is due at the end of the month.
Roger Turner is general secretary of the National Federation of Occupational Pensioners. For more on the NFOP’s campaign go to www.nfop.org.uk