Making Financial Investments for Your Grandchildren

The arrival of a new grandchild brings joy to the heart of a grandparent. Instinctually grandparents want to look out for the littlest family members, hoping to help them to grow up happy and healthy. Many grandparents also hope to assist their grandchildren by making financial investments on their behalf, but are sometimes unsure as to the best ways to go about choosing which investments will prove most fruitful.

Start Young

Obviously, starting early in a child's life allows the most time for financial investments to grow and mature. When begun right after a child's birth, even small, steady growth can add up to a considerable sum by the time that the child reaches 18. But even grandparents who choose to begin investing for their older grandchildren can be assured that by making careful selections, the grandkids will benefit. With ever increasing costs facing kids heading off to university, every bit of financial assistance means a lot.

Professional Advice

While financially savvy grandparents may be able to go it alone in planning investment portfolios for their grandchildren, most folks are more comfortable to seek the advice of a professional financial planner. Investment counselors can make suggestions based on a number of factors, including the amount of the investment, length of time before funds are needed, and the level of risk that the grandparent is comfortable taking. Typically, higher risk investments have the potential to be the most lucrative, but they are also those which are most likely to fail. Choosing a balanced portfolio which combines several types of investments with varying risk levels is a plan that many investors find most beneficial.

Taking Advantage of the Child Trust Fund

All newborn babies in the UK now receive Child Trust Fund vouchers from the Government worth at least £250. Each year, relatives are allowed to add up to £1,200 to each child's account and depending on the type of Child Trust Fund account that the child's parents chose, minimum contributions to the account can be as little as £1. These funds cannot be touched until the child reaches 18, but there are no restrictions as to what the money can be used for at that point. At maturity, children can even choose to roll the proceeds from their Child Trust Fund into an Individual Savings Account (ISA), taking further advantage of the savings benefits. In any case, this tax free savings plan is in place to encourage saving for children and should ideally be utilized to its maximum capacity.

Other Savings Accounts

In addition to the Child Trust Fund, several other types of savings accounts are available for children, including instant access, notice accounts and term accounts. Instant access savings accounts allow penalty-free withdrawals at any time, notice accounts offer penalty-free withdrawals, but require a set notice time (typically 60 or 90 days), and term accounts require that funds remain for a set period of time before withdrawal or closure of the account. It is important to note that while the interest on some types of savings accounts is taxed in the parents' names, gifts from grandparents or other relatives are exempt.

Non-Savings Account Investments

Asset-backed investments such as properties and equities have long been thought to outperform fixed interest investments such as bonds, over the long haul. Schools of thought vary widely on just which investments will prove to be the best, though and one thing remains certain: there are no guarantees. All investments carry a certain level of risk; the trick is for investors to be as knowledgeable as possible in order to minimize the chances of making costly mistakes.

Investment trusts are typically how parents and grandparents choose to manage the investments of the minors in their care, largely because the expenses are less than they are for unit trusts and open ended investment companies (OEICS). While minors in the UK cannot hold collective investments in their own names, parents or grandparents can invest on the children's behalf and hold the funds in either designated accounts or bare trusts until the children are of age.

Designated accounts are held in the name of the adult, with the initials of the child added on. When the child reaches the age of 18, the adult may choose to give the child the funds directly or use them for another purpose, such as education expenses.

Bare trusts require nothing more from the adult than to hold the funds in the account until the child reached maturity and then pass the proceeds onto the child/grandchild. When the adult accountholder is the child's grandparent, the tax liability on dividends falls to the grandchild.

Things to Consider

For many types of investments geared toward children, grandparents must be prepared for the possibility that at age 18, their grandchild may use the proceeds from their savings for a wide variety of purposes, some of which may not be what the grandparents had hoped for or intended. While this may be acceptable for some grandparents, especially when the amount of the investments isn't particularly enormous, other grandparents may wish to exert greater control over the funds. For large portfolios, grandparents may wish to seek legal advice when planning their investments so that they can assure that the funds will not one day be spent in a way that they view as frivolous.