Grandparents are being urged to consider what they want their financial gifts to achieve before deciding on the best way to pass on cash gifts to grandchildren according to Brewin Dolphin.
Ammo Kambo, Chartered Financial Planner at Brewin Dolphin said: “As a nation of savers, it is up to us to ensure that the next generation has the tools and mindset to make their money work harder. Saving is a good habit to fall in to, no matter how big or little the amount, saving regularly can have a significant impact.
“Cash JISAs are the most popular choice of JISA1, but they may not always be the best option for long-term savers particularly if inflation is high. Each option serves a purpose, and the final decision should be based on what you want the child to do with the money once they’re of adult age. A child pension might give them more financial freedom in retirement, but it won’t be the best option if you want the child to be able to pay for university tuition fees or to pay for a deposit for their first home. There are many things to consider but considering the financial goal at the outset is often the sensible first step.”
The latest ONS data2 reveals there is £858m in Junior ISA accounts, with around 61% sitting in cash. Grandparents making financial gifts may want to follow the status quo and put the money in cash but there are other options to consider before acting. To help grandparents decide, Brewin Dolphin has conducted analysis illustrating how a cash JISA, stocks and shares JISA and child pension could perform over an 18-year period, as well as the pros and cons for each option available.
Cash JISA – Growth 1.50% pa
Stocks & shares JISA – Growth 5.0% pa
Child pension – Growth 5.0% pa
Initial investment at birth3
£2,880 (+£720 tax relief)
Regular annual investment
£2,880 (+£720 tax relief)
Balance at age 18
Exploring the popular options
Cash Junior ISA
Cash Junior ISAs (JISAs) are long term tax free savings accounts for children, as opposed to savings which you may pay tax on such as fixed rate bonds. The current annual allowance for JISAs is £4,260. Children can take control of the account when they turn 16 but are unable to withdraw the funds before their 18th birthday.
Pros: Cash JISA savings rates are typically higher than other cash savings accounts; you won’t pay tax on interest on the cash you save.
Cons: Low levels of interest means the invested capital is unlikely to grow much; cash can be expected to lose purchasing power when inflation is high.
Stocks and shares Junior ISA
Stocks and shares JISAs are long-term tax-free investment accounts for children. The current annual allowance for JISAs is £4,260. Children can have both a cash JISA and a stocks and shares JISA. As with the cash JISA, children can take control of the account when they turn 16 but are unable to withdraw the funds before they turn 18.
Pros: Ability to invest in a wide range of shares and investment funds; investment options can outperform saving rates and inflation over the long-term.
Cons: Stocks and shares JISAs might not be suitable for someone with a low risk appetite or a short-term outlook.
Child pension (Junior SIPP)
A Junior SIPP is a type of pension for a child, which benefits from tax relief at the basic rate giving savers a 25% bonus on all sums saved. The current annual allowance for Junior SIPPs is £3,600. The pension pot accumulated will be inaccessible until the beneficiary is aged 55, or 57 from 2028. As the capital is tied up for over 50 years, this may encourage a more adventurous approach to investing which can achieve greater returns.
Pros: The government provides tax relief, so a £2,880 investment is topped up to the £3,600 annual allowance; you can invest in a wide range of shares and investment funds.
Cons: Lower annual allowance than ISAs; savings are tied-up until the child reaches 55 (57 from 2028).
Before passing on any wealth, grandparents need to be aware that they can gift grandchildren up to £3,000 in any financial year before incurring inheritance tax. The amount of tax to pay on gifts of more than £3,000 depends on whether it was given within seven years before the person died. Individuals can carry over any leftover allowance from one tax year to the next, up to a maximum of £6,000.
For more information: https://www.brewin.co.uk/