Saving for grandchildren
Becoming a grandparent is undoubtedly one of life’s great moments.
Having been through the parental journey…
…this time around you can focus on fun days out and enjoy buying frivolous, yet beautiful clothes and gifts you know they will grow out of in a few months, and then hand them back at the end of the day.
Whether you are a first-time grandparent, or have amassed a commotion of grandchildren (yes, that is the collective term), you may be thinking about how you can save or invest for your grandchildren to ensure they can access funds when you think they might benefit from them most.
There are many ways to support your grandchildren financially. Our guide provides an overview of some of the key considerations and solutions that are available. However, it is always best to seek professional financial advice before making any firm decisions.
When life changes
Gifts and inheritance tax
Grandparents often use gifting as a way to minimise inheritance tax payable on their estate.
Lifetime gifts may include money, possessions and property. Anything left in your will does not count as a gift, but forms part of your estate.
There are gifting allowances and exemptions for inheritance tax which grandparents (and other individuals) can utilise.
Timing of support
You may want to consider your gifting strategy based on your timeline and the life stage of your grandchildren.
You may want to make regular gifts into an instant access cash account or savings account. This can encourage children to become financially savvy from a young age.
Regular gifts made from surplus income may qualify for an exemption for inheritance.
You may prefer to make a lump sum gift that your grandchildren can access at a pre-agreed date, meaning they may benefit from these funds at a time when they are likely to need it, for example, education costs, getting on the property ladder, travelling, or even at retirement.
Furthermore, you may prefer to leave something in your will providing you with control and access to your finances during your lifetime.
Which strategy is right for you?
You can contribute to your grandchildren’s financial futures by paying into a savings account that has been opened by the child’s parents or legal guardians.
Instant access cash accounts can be beneficial if you are looking to make regular deposits. Fixed term interest accounts let you save a lump sum over an agreed period.
If a financial gift comes from a child’s parent and the interest comes to more than £100 in a tax year, tax is charged at the parent’s marginal rate of income tax. If grandparents pay directly into the grandchild’s account this does not apply.
Junior Individual Savings Accounts (JISAs)
JISAs are one of the most tax efficient investment wrappers available. Assets within a JISA are not subject to income tax or Capital Gains Tax (CGT). They can be set up as cash JISAs or stocks and shares JISAs.
While these can only be opened by a parent or legal guardian, anyone can pay into the JISA, within their annual limit (£9,000 for the 2021/22 tax year). This is a great vehicle to help save towards your grandchild’s future. Your grandchild can take control of the asset when they reach 16, but cannot withdraw the money until they turn 18. This could provide a healthy lump sum on their 18th birthday, opening up more options as they make important decisions about their future. While they could of course spend the lot, you will have hopefully instilled some financial responsibility by this time.
Lifetime ISAs could help your grandchild save for their first home or top up their pension savings for later life. They can only be opened between the ages of 18 and 39, so while you cannot open these for your grandchildren, your grandchild could contribute up to £4,000 per year and get a 25% government bonus on top of that.
Junior Self-Invested Personal Pension
This really is a long-term savings option. This could give your grandchild a substantial headstart in saving for their future. The funds in a SIPP cannot be accessed until age 55, rising to 57 in 2028, and likely to rise further in future years. However, the power of compound interest and growth in the portfolio over decades could be considerable. This could be the most valuable gift you make. You can invest up to £3,600 gross per child per tax year. HMRC will pay 20% tax relief (up to £720) so you can put in up to £2,880.
Gifting via a will
Gifting via a will means that your grandchildren inherit assets on your death. This approach means that you retain control of and access to your assets throughout your lifetime.
Writing gifts into trusts
When making gifts to your grandchildren, you may wish to consider the use of a trust. Trusts are an effective way of making gifts to your nominated beneficiaries. You can retain an element of control over the distribution of income and capital by appointing yourself as a trustee and drafting a letter of wishes. It is best to seek professional financial advice if you are thinking about setting up a trust.
Of course, it is not just about giving your grandchildren money or other assets. Many grandparents will want to take a more active role in the financial wellbeing of their grandchildren. This could involve teaching them about finances, helping to encourage habits around budgeting and savings, and even investing when they are old enough to take an active interest.
Enjoy the experience
It is important to remember that not all gifts have a monetary value. The most valuable gift you can give your grandchildren is your time. Spend it well.
If you would like to understand more about how we can help you save for your grandchildren, please get in touch.