Throughout your life, you’ve probably seen your wealth grow significantly, whether that’s in cash, investments, or through other assets such as property. While this is probably enough to provide you with a comfortable lifestyle, you may consider using it to help your loved ones too.
If you have children or grandchildren, you may want to use some of your wealth to give them a helping hand financially. As you probably know, rising costs of living and stagnant wages have made it difficult for many young people to achieve financial goals, such as buying a home.
Whether you’ve got your children or grandchildren in mind, there are a variety of things that you can do. Read on for three valuable ways to provide financial security to your loved ones.
1. Start a Junior ISA on their behalf
If you want to start putting money aside for your children or grandchildren, one of the easiest ways to do so is with a Junior Individual Savings Account (JISA). While only parents and legal guardians can open these accounts for children, grandparents can contribute to them once they are open.
The benefit of a JISA is that they are a tax-efficient way to grow wealth in the long term, as any returns are free from Income Tax or Capital Gains Tax. Due to this valuable benefit, each tax year (6 April to 5 April) there is an annual limit on how much you can contribute.
In the 2021/22 tax year, you can contribute up to £9,000 into a JISA.
There are two main types of JISA: Cash, and Stocks and Shares.
Junior Cash ISA
This is one of the simplest types of ISA available and is a popular choice for saving on a child’s behalf, as they often have a high degree of flexibility. However, one potential issue with these accounts is that if the interest rate is lower than the rate of inflation, the true value of the savings could be eroded.
Junior Stocks and Shares ISA
Another popular product that you may want to consider is a Junior Stocks and Shares ISA, which allows you to invest money on behalf of your child, rather than holding it in cash. It’s important to bear in mind, however, that since you are investing there is a risk of losing money.
One key fact to remember about JISAs is that your child or grandchild cannot access the money until they reach the age of 18, however they gain control at age 16.
It’s also important to note that stocks and shares investments do not afford the same capital security as deposit accounts.
2. Invest for the long term on their behalf
Another way to build wealth for your children and grandchildren is to invest some of your wealth and give the proceeds to them after a length of time. For example, you could invest a portion of your wealth when a child or grandchild is born and transfer it to them when they turn 18.
One of the key benefits of doing this is that it gives the investments longer to benefit from compound growth. Simply put, this is when you receive returns on previous growth. While it may start small, over time it can add up to a significant amount.
3. Start a pension for them
Starting a pension on a loved one’s behalf might seem an unusual way to help them, but in the long term it can be a valuable gift. One of the main reasons for this is that, as we discussed in the previous section, they can benefit from compound interest.
From April 2028, your child or grandchild won’t be able to access their pension until at least the age of 57, although this may actually be a benefit as it can grow for longer. This means that when they come to make withdrawals, the sum may be much larger.
Furthermore, they could also benefit from tax relief on top of your contributions. You can pay up to £2,880 into a pension on behalf of a child or grandchild in the 2021/22 tax year, which the government will top up with tax relief.
If your child earns more than £3,600 per year, such as through modelling or acting, then they can contribute up to 100% of their income or £40,000 into their pension each tax year, whichever is lower.
While it may seem odd, starting a pension on behalf of a child or grandchild can give them invaluable long-term financial stability and can help them to afford a comfortable lifestyle in retirement.
Get in touch
If you want to help your loved ones financially but aren’t sure what is the best way to do it, get in touch. Please email info@investmentsense.co.uk or call 0115 933 8433.
Please note:
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
The value of tax reliefs depends on your individual circumstances. Tax laws can change.
