Put £100 a month in a Junior Isa… and a grandchild gets £35,000 by 18

Giving a grandchild a five-figure gift for their 18th birthday may seem prohibitive to most people. But savvy grandparents who regularly save a small amount into a child’s junior Isa could easily achieve that goal. Not only will this help grandchildren to get on a solid financial footing, it can also reduce grandparents’ tax burden.

Junior Isas are savings and investment accounts designed to make investing as easy and lucrative as possible for under-18s.

All money saved can grow completely tax-free – meaning no taxes on savings interest, investment income or income. They’re almost identical to Isas available to 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 legal guardian, grandparents — as well as friends and other family members — can contribute at any time without jeopardizing their personal Isa grant.

If a grandparent contributes £20 a month from the birth of a grandchild, they have built up a nest egg worth more than £7,000 by the time the child turns 18. The calculations assume investment growth of five percent after fees. If they save £100 a month, the pot would be worth nearly £35,500 by the time the child turns 18. This could be an invaluable contribution to college or university, travel plans, or even putting down a down payment for a first home.

Laura Suter, Head of Personal Finance at wealth platform AJ Bell, says: “For grandparents who have more money to splash around, putting away the full £9,000 Junior Isa allowance every year from birth becomes a pot worth almost £266,000 £ until her 18th birthday.’

Even grandparents with older grandchildren can create healthy savings pots by regularly saving. A grandparent who starts contributing £100 a month for a five-year-old grandchild could hand over an account worth just over £22,000 once the child turns 18.

As the cost of living depresses household income, it is becoming increasingly difficult for parents to save for their children. Grandparents may also face the same budgetary pressures, but those who can afford it may find their contributions particularly 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 right now – but sometimes it can be may the Bank of Gran and Grandad come to the rescue.’

Buy college tuition instead of toys

Bertie Hale’s four grandparents contribute to his Junior Isa every year – although 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 shortly after he was born – whose full name is Hubert after one of his great-grandparents. Josh says, “I wanted a tax-friendly, long-term savings vehicle for Bertie that will hopefully help him with whatever his life takes him to when he turns 18, be it college, travel, housing or space travel!”

He adds: “We also wanted to encourage our relatives to give money that might come in handy later, rather than buy him plastic toys, especially when he’s still at an age where he has no idea who gave it to him What.’ Josh chose sustainable investments from the Liontrust fund group, which is accessed through Hargreaves Lansdown. “Hopefully the money will be used wisely,” he says.

Josh and Natalie fill up Bertie’s junior Isa every now and then, and Bertie’s four grandparents transfer his Christmas and birthday gift money straight into his account.

At the same time reduce inheritance taxes

Creating a savings pot for a grandchild can also be a good way for grandparents to reduce the inheritance tax burden.

Grandparents can give gifts totaling up to £3,000 each tax year without risking an inheritance tax bill. They can also donate more than this amount without incurring inheritance tax as long as they live at least seven years after the gift.

Some grandparents may also be able to benefit from a little-known inheritance tax credit that allows you to give away regularly from income, as long as it doesn’t affect your quality of life.

Inheritance tax is only ever payable if your estate is worth more than £325,000 – £650,000 for a married or civil union couple. Couples can pass on wealth up to £1m tax-free when they inherit a family home.

What will they spend it on?

Once the child turns 16, they can control the money invested in their Junior Isa, although they cannot withdraw it until they are 18. At this point, parents and grandparents cannot control how the teenager spends it. However, by showing them the value of saving or investing, they can hopefully continue this habit throughout adult life.

Myron Jobson, senior personal finance analyst at investment platform Interactive Investor, says: “Remember, you may have earmarked the Junior Isa to fund a college education or a home deposit, but you may prefer to use it for a vacation in Las spending Vegas and a flashy car.’

Allowance gap if you are a wealthy teenager

Due to an unusual quirk, 16- and 17-year-olds can contribute to both a Junior Isa and an Adult Isa. That’s because junior Isa’s can be deposited up to the age of 18, while adults can be opened by anyone over the age of 16. That means her total annual allowance is a whopping £29,000.

In reality, few people of that age have such sums.

If you’re feeling really generous…

Grandparents can also contribute to a child’s pension and thus make provisions for old age. You can pay in up to £2,880 a year, which is matched by up to £3,600 in tax relief from the government.

However, the money will be locked up until the child is 57 years old. If a grandparent paid £100 a month into a grandchild’s pension from birth until the age of 18, by the time the grandchild turns 57 it could be worth around £244,000.