Feathering their nests

This spring we’ve all seen adult birds flying themselves ragged with non-stop feeding of the fledglings in the nest. That thought brings to mind today’s young parents, struggling to cope with the continuous financial demands of their children.

Enter grandparents with assistance ranging from informal childcare to structured investment and savings schemes designed specifically for children.

If you decide to follow the financial help route, you can choose between a lump sum, minimum typically £500 but with additional contributions, which can be modest, or by regular savings sometimes as little as £10 a month – all in collaboration with the parents, of course.

Take, for example, Junior Isas. Only a parent or guardian can open it for a child, but you can contribute to it afterwards. You’ll need the parents’ input in determining when your investment should mature – and when little Milly or Harry should be entrusted with this windfall.

The first thing to do is to check out that a Junior Isa has been set up for your grandchildren. The maximum annual contribution is £3,600 (rising in line with the consumer price index from next April) and is linked to the tax year, not calendar year.

The money can be in either a cash or investment Isa or split, in any proportion, between the two and also switched between them. A mix of the two is appropriate for older grandchildren but for those under 12, an investment Isa only is more suitable. The money, which accumulates tax free, cannot be withdrawn until the child reaches 18. Virtually all financial services companies offer Junior Isa packages.

Your check-list should include initial and annual management charges, online dealing costs and the minimum investment for both lump sums and regular savings.

If the Junior Isas have been taken care of, many groups also have children’s savings plans which offer similar investment opportunities without the Isa tax benefits. The money can be held in a designated account for the child, but you remain the owner until the child is 18 and can cash it when you (or the parents wish). Alternatively, it can be set up so that child is the owner with the money held in what is known as a bare trust until the child is 18 (16 in Scotland).

Skipping from short term to very long term, you could also invest for your grandchildren’s old age with a stakeholder or personal pension or a SIPP (self-invested personal pension), which can’t be taken until age 55. A child gets the same tax break as a non-earnings person and can contribute (via you) a maximum of £3,600 gross each year, of which the government pays 20 per cent by way of tax relief, thus reducing the cost to £2,800.

As you are cascading wealth down the generations, what about your own position regarding inheritance tax? One annual gift of £3,000 is exempt (and you can carry an unused gift forward one year), then any number of £250 gifts can be made (but not to the £3,000 beneficiary).

If you plan to save/invest regularly for the grandkids, then the most useful exemption is the “gift from normal expenditure” which provided it doesn’t affect your standard of living is normally free from inheritance tax.