My wife and I have recently been blessed with our first grandchild and we want to make a monetary gift to the baby for her future. It is likely that a similar gift will be made each year on her birthday.
We have been advised that one of the best options available is to make a £2,800 annual contribution on her behalf to a stakeholder pension and wondered whether you agree with this advice.
Since their introduction in 2001, stakeholder pensions have proved most popular with well-off husbands buying them for their non-working wives and grandparents buying them for their grandchildren.
The main reason for this is that up to £2,808 a year can be contributed into a stakeholder on behalf of someone who has no earnings. Income tax relief can then be claimed, grossing the amount invested up to £3,600, even though the planholder has paid no tax.
While it may be appropriate in a number of cases for a husband to invest in a pension for his wife, I can see only extremely rare circumstances where advising a parent or grandparent to invest in a stakeholder for a child could possibly be conceived as good advice. Anyone recommending such an investment as being appropriate could be faced with a claim against them at a much later date.
A grandparent providing for a potentially serious shortfall in a child's eventual retirement income could prove to be self-prophesising because choosing a stakeholder rather than an investment where access may be achieved before age 50 could seriously damage the child's future well-being and security.
Creating a fund that your granddaughter could use to gain a good education, rather than a moderate pension in retirement, could make all the difference to her life – so much so that her final retirement income far exceeds anything that could have been provided by the money being invested in a stakeholder.
Looking further ahead, when your granddaughter is in, say, her mid-20s and is considering buying her first property, she may find that she lacks sufficient resources to pay the deposit. She may then have to spend the next few years living in expensive rented property before she can save up to buy her own home, in the meantime suffering from the effects of property price inflation. Had you chosen to invest in something that she could have accessed at this point, rather than a pension, her lifestyle could have been much improved.
Regardless of what investment structure is chosen, given that the investment period will be at least 18 years, it should be predominantly equity-based. While equity exposure can be gained via endowment policies or friendly society bonds, I feel that the charges and inflexibility associated with such plans makes them a poor second choice to a portfolio of unit trusts, even after taking into account the tax benefits offered through friendly societies.
You can invest in a unit trust or open-ended investment company and identify it as designated for your granddaughter's benefit by adding her initials after your surname or in a specific section on the application form.
By designating an investment in this way, you create a simple bare trust and all income or gains arising from the investment will be taxable on your granddaughter. As she will no doubt have unused personal allowances, the result should be that no additional tax is due at least until she reaches adulthood.
Even though the investment is designated as belonging to your granddaughter, you will have total control over it as a trustee and can therefore ensure that it is invested in the most appropriate environment. The only downside of this type of designation is that your granddaughter will become legally entitled to the investment at age 18, which you may feel is too young. To extend the age at which access can be achieved without your consent, a slightly more sophisticated trust could be used.
There are literally hundreds of Oeics and unit trusts that would provide a suitable home for your gift but you should appreciate that where an investment is promoted with children's characters, it is nothing more than a marketing gimmick.
Apart from perhaps a birthday card, these packages rarely offer anything extra. Investment decisions should be based on sound fundamentals and not the attractiveness of the brochure.
In summary, no one knows what the future holds. The wrong choice now could mean that your granddaughter does not have access to funds to help her achieve a good education or get on the property ladder soon enough.
Consequently, life could be a struggle, the end result being that she desperately needs the retirement fund you provided for her all those years ago.