Grandparents are often keen to contribute to grandchildren's savings and investments, as a way of rolling wealth down the generations and stopping the taxman from getting his hands on it. Many are saving or investing to help pay university fees or simply give their grandchildren a good start in life.
Junior ISAs can give children a great start in life with a tax-efficient savings and investment account.
Once family and friends have subscribed to the Junior ISA there's no capital gains tax and no further tax on any income. Interest on cash held in a Junior ISA is paid gross. Remember tax rules can change over time, and the value of benefits will depend on the child's circumstances.
No withdrawals are permitted until the child reaches 18, when their Junior ISA is automatically converted into an 'adult' ISA. They are then entitled to full access to their investments and savings, to help with the cost of university, provide a deposit for a house or simply give them a financial cushion as they enter the jobs market.
Child pensions, such as the Vantage Junior SIPP, are an increasingly popular way to give children a financial head start in life. This is partly due to the generous tax relief available - under current rules the government automatically pays 20% of your investment (irrespective of the tax status of the child or donor).
Each child can contribute (or have contributed on their behalf) up to £3,600 a year to pensions in total. The tax relief means £3,600 in your grandchild's pension only costs you £2,880. Tax rules may change in the future.
And, as pensions generally cannot be accessed until age 55 (57 from 2028), you can rest assured the money will be used to provide for your grandchild's retirement.
Accounts must be opened by a parent or guardian who is happy to make investment decisions on behalf of the account holder. Parents can open the Vantage Junior ISA without subscribing any cash if the funds are coming later from a third party such as a grandparent. Alternatively, parents can complete and submit a paper application form to open a Junior ISA accompanied with a cheque from a grandparent.
Once a parent or guardian opens a Junior ISA, friends or family can make a contribution up to the annual limit. Junior ISA top ups can be made online, by post or by telephone as a lump sum or by monthly savings.
The SIPP must be opened by a parent or guardian who is happy to make investment decisions on behalf of the account holder. If the child is over 16 they will need to sign the Vantage Junior SIPP application, otherwise it will need to be signed by the child's legal guardian. In both cases the legal guardian form will also need to be completed.
After the Junior SIPP has been opened grandparents can make lump sum contributions by cheque. To top up an existing Junior SIPP, send a cheque for the net amount with a covering letter including your own details and those of the child. The contribution will be held as cash unless you provide investment instructions countersigned by the child's legal guardian.
When money or assets are paid into an account (including Junior ISAs, Junior SIPPs and designated accounts) for someone else's benefit, they are treated as a gift. Some gifts are free or exempt from tax, others may be subject to inheritance tax.