Many grandparents may think that children get everything they want these days — from smartphones to e-scooters and games consoles. It is all high tech, and it all costs hundreds of pounds, but today’s latest gadget is very likely to become obsolete within a few years.
So what gift can grandparents make that will grow in value and still be around when their grandchild turns 18? HOw about a Junior Isa?
Opening a rather awkwardly titled Jisa in your grandchild’s name could present them with a tidy lump sum that could be used to buy a car, go towards university costs or even pay for a house deposit. How much better than a soon-to-be landfill piece of plastic kit?
Jisas have to be opened by a child’s parent or legal guardian but once it’s set up grandparents, friends or other relatives can contribute as much as they like up to the £9,000 annual allowance.
As with adult Isas, you can choose from cash, stocks and shares or a bit of both. All earnings from interest, capital gains and dividends are tax-free.
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The money belongs to the child and cannot be withdrawn until they turn 18. At 16 they can take control of the account, for example by paying in money or transferring from cash to stocks and shares.
Simon Cooper’s daughter, Louise, opened a stocks and shares Jisa three weeks after her son, Harvey, was born in April last year so that Cooper could start investing for his first grandchild straight away. Cooper and his wife Sara, a retired human resources manager, deposited a lump sum of £4,000 to get the investment off the ground. They plan to save an extra £1,000 each year for the next five years before reviewing the saving plans with Harvey’s parents.
“I wanted to keep it simple,” said Cooper, a retired talent development director for an IT company. “I’ve put £3,000 into a global exchange-traded fund (ETF) and £1,000 into a Real Estate Investment Trust that pays a dividend. If we or his parents can’t afford to put money in we can buy units in the ETF, using those dividends.”
Next year the couple, both 57, plan to add two more income-yielding investments to Harvey’s Isa and reinvest the dividends into his ETF.
“By starting his investments off at such an early age the key advantage Harvey has is time,” said Cooper, from Bournemouth. “He’ll benefit from compounding and by investing regularly, if there’s a market crash he will pay a lower price to invest in the ETF.”
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An investment Jisa is likely to grow more than a cash version, but your capital is at risk when invested.
If your grandchild was born today and you saved £50 a month into a cash Jisa earning 0.5 per cent then by their 18th birthday they would have £11,300, according to the stockbroker AJ Bell. The same amount saved into a stocks and shares Jisa, earning an average of 4 per cent a year, would generate £16,000.
To give them enough money to pay for university you would need monthly contributions of £150 to build up a fund of £50,440, roughly the average amount of debt a graduate has on completing their studies. Investing the full annual allowance of £9,000 from birth, assuming an annual return of 4 per cent, would build up to £240,040 over 18 years.
When picking a stocks and shares Isa make sure you compare fees, which vary widely. Fidelity and Interactive Investor, do not charge you to open a DIY stocks and shares Jisa, according to the website Boring Money. To benefit from Interactive Investor’s free Jisa, however, you must already be a customer. Annual fees for ready-made portfolios are as low as £10 and climb to more than £100, depending on how much you invest.
● Saving through the ages: what to put away and when
● A beginner’s guide to Isas: the seven ways to save
● Want to retire early? Use your Isa as you wait for your pension
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Holly Mackay from Boring Money said: “One-stop shop services which pick and blend a sensible mixed bag of investments are best for less confident investors. I suggest Nutmeg or Wealthify for beginners. Fidelity is a nice option if you want some help but fancy exercising a bit of choice in investments too.”
Choosing between a cash or investment Isa is also important.
“If your grandchild is young and the money will be used for a property purchase in 20 years’ time, a stocks and shares Isa invested in global equities could be appropriate,” said Alex Shields from the financial adviser The Private Office. “If the value of investments falls in the short term, they should have time to recover before they are needed.”
If they are in their mid-teens when the accounts are opened, and the funds are earmarked for university, a cash Jisa that does not put the capital at risk would be more appropriate, he said.
Harvey’s portfolio should be worth more than £50,000 on his 18th birthday.
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“It’s a decent amount that will give him a start in life and hopefully I’ll be able to persuade him to keep it invested for another ten years,” Cooper said.
