How can I help my grandchildren invest for their futures?
- 04 September 2020
- 15 minute read
Millennials are the first generation to be worse off than their parents.
As a grandparent you might be thinking of how you could help out.
In this article we look at some of the ways you could help provide a more comfortable life for the next generation.
Grandchildren. All of the fun, none of the 3:00 am nappies. Being a grandparent can be one of life’s most rewarding roles. Grandparents have a reputation for being doting, and why not? And it’s not all about sweets and toys. A survey for Saga carried out by Populus in 2017, found that 66% of grandparents said they were ‘considering, intending to, or already had given substantial financial gifts to their grandchildren.’ With mounting education costs, house prices, furloughs and now redundancies, helping your grandchildren could be rewarding in more ways than one.
Move over bank of mum and dad.
Once you’ve decided who and how much, you’ll want to think about how to do this in a tax efficient way. After all, you’d like to give money to your grandchild, not HMRC.
Think about inheritance tax
If you give away more than £325,000 in total and die within seven years, the people you gave the gifts to will have to pay inheritance tax. And this could be awkward if they’ve already spent it. However, you can give away £3,000 a year without it counting towards your final estate value. On top of this, if your grandchild gets married or becomes a civil partner you can give them an extra £2,500 potentially tax free.
Tax treatment depends on the individual circumstances of each client and may be subject to change in the future.
Read our article Intergenerational wealth transfer: it’s all the rage for more about inheritance tax.
Small birthday and Christmas presents up to £250 per person, per year don’t count towards inheritance tax, so don’t worry about those. You’re also allowed to give gifts that you take from your normal income inheritance-tax free, as long as you can demonstrate they are from your surplus income. That is, they don’t affect your ability to maintain your standard of living, and they haven’t come from your savings or other capital.
Could you use a trust to help your grandchildren invest?
If you are thinking of a significant gift, then you might consider setting up a trust. There are various trusts that could be suitable, with different ways in which they can be structured for your needs, so we recommend you take legal and financial advice.
If you’re interested in using a trust, take a look at our article about the role of trusts in estate planning.
Tax-efficient investment vehicles
You may want to consider putting money in a tax-reducing savings or investment vehicle to lower the amount of tax your grandchild will have to pay.
If your grandchild is below the age of 18, then you need to speak to their parent(s) or guardian(s) about setting up, or topping up any existing accounts. Make sure everyone keeps a record of any correspondence or the parent/guardian might become responsible for an extra tax bill.
And putting a regular sum away each month rather than giving occasional lump sums can be a good way to demonstrate it has come from surplus income.
Read more: Investing for children.
Individual Savings Accounts (ISAs)
When it comes to ISAs there are three different accounts available: the traditional adult ISAs, Junior ISAs (JISAs) and Lifetime ISAs (LISAs). All of them offer the chance to save in cash or investments, with both income and capital growth free from tax.
If your grandchild is an adult, then you can offer to top-up their ISA account if they have not taken advantage of the annual limit (currently £20,000). Ask them about creating an account if they don’t have one already. With a grown-up ISA, your grandchild could take money out any time, and they will pay no income or capital gains tax when they do.
If your grandchild is younger than 18, then the parent or guardian will have to open a Junior ISA account in their name and pay any money in, as outlined above. The annual savings limit for 2020/21 is £9,000 per child. Once the child reaches 18, the JISA will transform into a standard adult ISA.
A Lifetime ISA can be thought of as a hybrid between an ISA and a pension plan. It’s for people aged over 18 and under 40. It has the benefit that the government will top up any investment with a bonus of 25% up to a maximum of £1,000. Once you turn 50 you won’t be able to pay into your LISA or earn the 25% bonus.
But unlike a normal ISA, the money can only be accessed for one of two purposes: as part of the deposit on your first home, or to fund your retirement from age 60. If you take money out for any other reason there’s a withdrawal charge of 20% to recover the bonus, going up to 25% in April 2021.
The value of investments and the income from them can fall as well as rise and the investor may not get back the initial investment.
If your grandchild has already reached their ISA limit you can boost their savings in an ordinary savings account. Even here there are tax-free allowances that apply to for any interest earned so they’re not the less popular cousins you might think they are. The rules are complicated and depend on all sorts of things, like any other sources of income, and you can find out more about this on the government’s website here.
Could you pay into your grandchildren’s pensions?
If you’re thinking really long term, it’s possible to set up a pension in a child’s name. You can put in up to £2,880 a year which, with 20% tax relief built into the system, would take the total investment to £3,600. Some schemes will claim this on behalf of the scheme member but it shouldn’t be taken for granted.
Pensions are a long-term investment. The retirement benefits you receive from your pension plan depend on a number of factors including the value of your plan when you decide to take your benefits, which isn’t guaranteed, and can go down as well as up. The benefits of your plan could fall below the amount(s) paid in.
Your grandchild will get a wonderfully early start to their retirement saving, and that extra time can make a huge difference, thanks to the potential compounding of long-term investment returns. However, the young folk may be frustrated they can’t access the money until they’re age 55 or more, rising to 57 in 2028 and possibly beyond in the future. But when it’s time for your grandchild to retire, they’ll be able to withdraw 25% of their fund tax free.
Know the limits
There’s also the chance that by starting so early the pension total will go over the lifetime allowance for pension saving, currently £1,073,000. If they’re already an adult paying into a pension scheme, they’ll also want to stay below the annual allowance of £40,000 or 100% of their income if they earn less than this.
There are reduced allowances for people earning really high incomes. But they are not likely to need your help.
Caring for your family
Tax is just one thing to consider when thinking about financial help for those we love and care about. You may feel uncomfortable discussing finances with your nearest and dearest, but talking things through before making decisions can put you on the right track for future family harmony.
Talking to a financial adviser could help you navigate the savings and inheritance tax labyrinth – not just for you but for everyone involved in the decision. But most of all, talk your intentions through with your family.
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