How do I set up a future for my grandkids?

Give them a headstart with their savings

It’s no surprise some grandparents want to hand over some cash to their grandkids. Whether it’s with regular payments to boost savings, or helping out with a big purchase like buying a house or a first car, it’s a position that grandparents relish – particularly if they weren’t able to help their own children in the same way. 

Three things to consider before you start saving for grandchildren

Tempting as it may be to sign some of your savings over to your grandchildren, it’s important to look at your own financial situation first. Alistair McQueen, Aviva’s Head of Savings and Retirement recommends going through three steps before handing your money over: 

  1. “First, understand how much you can afford to save for others, after your own needs are met
  2. Consider where best to save. This decision will be influenced by the amount you have to save and over what time
  3. Finally, decide how to gift any money to your intended recipients. Red tape can surround these payments, particularly in the form of inheritance tax.

Deciding how much you can afford to save

When it comes to deciding how much to put aside for grandchildren, it’s important not to neglect your own needs. If you give money to your grandchildren but aren’t left with enough to cover your own expenses, your good intentions might backfire. 

“You may be required to call upon [your grandchildren] to help make your ends meet, thereby burdening, not helping, them”, Alistair points out. “A simple monthly budget of regular incomings and outgoings will help you understand how much you can afford to save." The government-backed MoneyHelper service has an online planner that can help.

Where to save money for your grandchildren

Once you’ve decided how much you can spare, you need to decide where to put your money. 

Junior ISAs

Want to make sure your grandchildren save their money? You could lock it away until they turn 18 in a Junior ISA. Your grandchild’s parent (or legal guardian) will need to open it on their behalf, but anyone can pay in up to £9,000 each year. 

It’s worth emphasising that the money really will be locked away until your grandchild turns 18 – no one can access it, including you and your grandchild’s parents. But if you want a tax-efficient way to save money for your grandchild in their own name, a Junior ISA is definitely worth considering.

Junior pensions

Forward planners, take note. Your grandchild's parent (or legal guardian) can open a Junior Self-Invested Personal Pension on the child's behalf as soon as your grandchild is born. It's protected from inheritance tax, too. The Junior SIPP allowance is £3,600 for the 2024/2025 tax year. This means you can pay in up to £2,880 and the government will top it up by 20%. Meaning if you pay in £2,880 the government will top up by £720, giving a total of £3,600 added to their pension pot. 

Of course, your grandchild won’t be able to access their pension pot until they reach 55, but what a way to invest in their long-term future.

The value of a Junior ISA or pension can fall as well as rise. You could get back less than invested.

Children’s savings accounts 

For a more flexible way to save money for your grandchildren, a children’s savings account is an option. The money can be accessed at any time and the interest earned won’t be taxed as long as your grandchild doesn’t have an income of more than £12,570 in 2024/2025 - which, let’s face it, is pretty unlikely.

Beware, though, that interest rates may not amount to much. “It is very possible that the interest rates available on many bank accounts will be less than inflation”, says Alistair. “If so, this would result in the spending power of your savings decreasing over time.” 

How you could give your grandchildren a lump sum

If helping your grandchildren out with a big purchase is something you’d like to do, but you lack a pile of money sitting in your bank account, your pension or property could help. 

Take money from your own pension

To help your grandkids out with a big purchase, you could use the money from your pension. Pension rules were relaxed a few years’ back and it’s possible to take a lump-sum or a bit as and when you need it when you reach retirement age. Whatever you withdraw, you’ll usually get 25% tax-free but pay income tax on the rest. Taking a large lump sum could increase the tax liability.

Consider equity release

Another way to give your grandchildren a lump sum of cash is to release some of the money tied up in your house. If you’re over 55 and mortgage-free, you could see if you’re eligible for equity release

Taking out equity release normally means a lifetime mortgage, which is a long-term loan secured on your home. There are no monthly repayments required and the loan and interest are normally repaid from the sale of your home when you die or go into long-term care, subject to terms and conditions. This means that the amount of inheritance you can leave behind will be reduced. Taking out equity release can also affect your tax position and eligibility for welfare benefits.

Inheritance tax

“It is said that there is nothing certain in life, but death and taxes”, says Alistair. “And inheritance tax follows us right to the end.” The tax paid on an estate when we die applies to money, property and possessions valued over £325,000 (or £500,000, if our children or grandchildren are inheriting it). 

Most people, naturally, want their loved ones to inherit as much as possible. There are a couple of things you can legitimately do to reduce inheritance tax – and your grandchildren could benefit from them too. 

Gift £3,000 and avoid inheritance tax

Thinking of giving your grandchildren some cash every year? Everyone has a £3,000 ‘annual allowance’ that they can give away to whoever they like, tax-free. The good news? This amount won’t be counted as part of your estate for inheritance tax purposes. 

Gift money to potentially reduce inheritance tax

If you want to give your grandchildren more than £3,000 in a year, it won’t be liable for inheritance tax if you live for at least seven years after passing on the cash. That’s thanks to something known as a ‘potentially exempt transfer’. You can give as much money as you like as a gift, as long as it doesn’t affect your own circumstances.

Of course, if you don’t live for a further seven years, the money will be counted as part of your estate. Alistair sums it up: “As a guide, if you are wanting to gift more than £3,000 to any one person in any one financial year, you may risk incurring inheritance tax on that payment. In these circumstances it would be good practice to seek the support of a financial adviser before doing so.”

Tax benefits are subject to change and are dependant on the individuals' circumstances.

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