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Setting Up Savings and Pensions for Grandchildren

By: Garry Crystal - Updated: 4 Apr 2015 | comments*Discuss
 
Grandchildren Pensions Savings Account

Grandparents often set up savings accounts for grandchildren as a way of financially contributing towards their future. Now, many grandparents are realising the benefits in setting up pensions instead of the usual savings accounts.

The Benefits of Savings Accounts for Children

Setting up a savings account will be a good start to any child’s life. With a savings account there is the option that the savings can be held until the child is a certain age, usually 16 or 18. This means that interest can grow on the money in the account for many years. It is also a way of getting a child interested in saving money and finances in general from an early age. Grandparents can see their financial gift as an investment in their grandchildren’s future. This can be a very beneficial present especially when the child is starting off in life and going to college or university.

Why Choose a Savings Account for Grandchildren?

A savings account is easy to set up and there are a number of options available. The interest rates should be the first factor to consider when opening a savings account. There are a number of options available such as limited access, fixed or variable interest rates and instant access. Interest rates will usually be higher if there are restrictions in place, such as a long period of time in which the money will not be accessed.

Opening a Savings Account in a Grandchild’s Name

It is perfectly legal for a grandparent to open a savings account in their grandchild’s name without the child’s knowledge. Many grandparents do this to keep the savings out of the child’s control and to provide a nice financial surprise. The savings given to a child can also be free from inheritance tax. Grandparents can give as much money as they wish in the form of a gift to grandchildren without paying inheritance tax. As long as the money comes from the grandparent’s after tax income it should be tax free.

Starting a Pension for a Grandchildren

Most children will not be concerned too much about pensions but setting up a pension for grandchildren does have benefits. Money set up in a pension plan is tax free and cannot be accessed until the named pension holder is 55. The government does have plans to implement a national pensions system but this may come with the ability to opt out. With the rising cost of living a pension plan may be one of the investment options that can be easy to opt out of. Many people also leave obtaining a pension until they are much older and having one already set up is at least a back-up.

Opening a Pension for Grandchildren

Stakeholder pensions are the most common pension type available. With a stakeholder pension the grandparent can either deposit a lump sum or make monthly payments up to £3,600 per year. Stakeholder pensions work by compounding interest on the money that has been deposited. In effect, the interest earned on the savings actually earns interest itself. The longer the money is placed into the stakeholder pension the more the compound interest will increase.

Setting Up A SIPP for Grandchildren

A SIPP is a Self-Invested Personal Pension Plan. A SIPP is a family pension fund with anything left over from the grandparents share, once they have died, going back into the fund. The disadvantage of a SIPP is that the government may decide to impose inheritance tax depending on how much is left to be transferred. Again, this type of pension fund cannot be withdrawn until the holder is 55 years old. Grandparents who do wish to set up some form of pension fund for grandchildren should take advice from a financial advisor or pension expert.

Setting up Bonus Bonds for Grandchildren

Another good savings option can be National Savings and Investments Bonus Bonds for children. Grandparents can invest a lump sum of up to £3000 and the bonds are free from both UK income tax and capital gains tax. Bonuses are paid once the investment has been in place for five years. The minimum amount that can be purchased is £25 and the interest rates are fixed for five years at a time. This is a good way to investing money for grandchildren, is guaranteed by the government, and comes with a guaranteed bonus.

Whichever pension or savings option is used it is important to tell a member of the family that one has been set up. A huge amount of money sits unclaimed every year when people die and leave forgotten bank accounts and insurance plans. Informing someone of the savings or pensions will mean the money goes where it is intended not to the government.

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[Add a Comment]
@Liz. Most banks here will only allow you to set up an account if you're a UK resident. The best options to consider are investment trusts or premium bonds. There's also nothing to prevent you from opening a savings account in your name and giving money to your grandchildren as they need it.
RetirementExpert - 8-Apr-15 @ 10:22 AM
Can I set up savings accounts for my grandchildren who live in Holland?LOG
Liz - 4-Apr-15 @ 9:33 PM
@ter A junior ISA is the most tax efficient way to save for a child, but as the parents are not resident in the UK this option will not be available at the moment.
You could look into the idea of a bare trust (ensure that you say it's for a child) - with a bare trust the beneficiary rather than the payee has responsibility for the capital and income held in the trust.
You could open a UK bank account and simply pay into it regularly, then transfer this to an alternative savings account, ISA etc when your grandchild returns to the UK.
Another option would be to buy some premium bonds - there's no interest, but always the possibility of winning (tax free)! You can cash them in whenever you like.
RetirementExpert - 11-Nov-14 @ 11:13 AM
My son & daughter in law have recently had a baby & I would like to set up some sort of account for her (my grandchild). The problem I have is that they live in Tokyo. They do plan to return to Europe some time in the future. Is it possible to do this in sterling even though they do not have a U.K address?
Ter - 9-Nov-14 @ 6:52 PM
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