Two-fifths of grandparents are saving for their grandchildren's future, according to research from JP Morgan. If this is you, consider what sort of legacy you want to leave. A well-formulated plan will leave the most impact - and result in higher levels of gratitude. If there is a specific goal such as university fees, this is something that you can enjoy discussing with your grandchild (once they are old enough). Putting money aside for private school fees is also a popular goal for grandparents.
If you have a 10 to 18-year investment period, you have plenty of interesting investment options among investment funds and direct shares. However, John Fletcher, director of financial planning services at Brewin Dolphin, expresses concern that family members are often drawn to Premium Bonds as a gift for a child. "The bonds are particularly popular with grandparents, but the returns are barely better than putting the cash in a moneybox for the next 18 years," he says.
Of course, your grandchild might get lucky and win a big cash prize. But do you really want to gamble on this? It is easier to gamble on your own behalf than on behalf of a child whose financial future may be more uncertain than your own.
The longest lasting legacy is for grandparents who wish to provide for a baby to consider investing in a pension. But don't expect your grandchild to be interested in talking to granny and grandad about their pension. This is something that you'll have to do on the quiet with the hope that you get gratitude from beyond the grave.
A pension is definitely the most tax-efficient way of saving for a child - you can save £3,600 a year (the maximum allowed) into a pension for a newborn child from birth and only have to make a net investment of £2,880. Plus, after seven years it will pass completely out of your estate.
The downside is that grandparents are unlikely to be still alive to see their grandchildren enjoying the income from the pension. But compound interest can work wonders for the child's future.
Figures from Fidelity show that if parents and grandparents were to invest £3,600 into a pension for a newborn child at birth when that child reaches the age of 65, they could have a pension fund worth £127,500. This assumes a growth rate net of charges of 5.5 per cent a year.
Maintaining the investment could make the child into a millionaire and enable them to retire early. Figures from Brewin Dolphin show that if parents and grandparents were to invest £300 a month into a stakeholder pension for a newborn child from birth, and the child keeps up the £300 a month contributions after they stop, when that child reaches the age of 55 in 2068 they could have a pension fund worth £1,670,000.
