A giving gift for grandchildren

According to the UK’s most famous toy store, Santa will be stuffing Disney’s Stitch and Lego’s Transformers into his sack first on Christmas Eve. Hamleys claim that these two toys are our children’s current favourites. Here’s another gift idea for you. Why not download the app version of the famous “Who wants to be a millionaire” game for free? Or why not bring the Jeremy Clarkson TV gameshow to life and aim to make your grandchildren millionaires by the time they are 40?

That would be a truly “transforming” gift for them this Christmas.

According to the Prince’s trust more than 50 per cent of 16 to 25-year-olds are concerned that they will never be financially secure in their lifetime. Sadly, unlike the Christmas pantomime, there is no magic wand for grandparents to wave to remove this fear. But there is an option you could consider that might even make your grandchild a millionaire by the time they reach 40.

How?

You could gift money to your grandchildren this Christmas. There are still two attractive child savings plans that receive a boost from significant tax incentives from the government.

1. Children's private pension

You can pay £2,880 tax efficiently into a junior self-invested personal pension (SIPP) each year. This is boosted by the government which adds a further 20 per cent through tax relief. Therefore £3,600 is invested for the child. Just ask your son or daughter to open a SIPP on their child’s behalf and you can contribute to it it. Your grandchild cannot access this new pension pot until they are 57 so it would grow until then.

2. Junior ISA

Every child has their own annual ISA allowance. These must also be opened by a parent (or guardian) but then grandparents can fund them.

You can contribute up to £9,000 every year and no tax will be paid a. The child can access this money from the age of 18.

There are two types of Junior ISA:

1. Cash ISA: This is  like a bank deposit account that pays a specified rate of interest, but no tax is charged.

2. Stocks and shares ISA: This allows you to invest in stock market linked investments which are obviously riskier than deposits, but which can offer the potential for much greater growth over the longer term. A growth that would also be tax free.

Combining the two could win your grandchild the top prize in their own version of the "Who wants to be a millionaire" game.

Let’s assume that your grandchild is a newborn. You could pay the maximum into a junior SIPP each year for them until they are 18. That would mean a gift of £240 a month from you (boosted by the government to £300.) At 18, with an assumed annual investment growth rate of 5 per cent, their pension pot would be worth c£104,000. If they simply left it to grow at the same rate then they would have a pot worth c£314,000 at age 40.

If you  chose to pay a further £750 a month into their junior ISA (£9,000 a year) and it achieved the same annual growth of 5 per cent, they would have a further c£263,000 at age 18. Leaving it to grow could see it rise to c£788,000 at age 40.

Add this to their pension pot and your Christmas gifts that began in 2024 could be worth c£1.1 million on or around their 40th birthday.

The above calculation is for illustration purposes only. Investment returns are not guaranteed, and your capital could be at risk. The ultimate value of your financial gift will depend on how much you can afford to invest for your grandchild and the investment returns achieved.

But this example does offer an insight into the potential magical powers of compound interest on children’s savings funds.

In the best traditions of the TV gameshow, why not “call a friend” in the shape of your financial planner? They can tailor a tax efficient gifting plan. Individuals can gift £3,000 IHT free each year, with additional gifts possible from ‘surplus income’.