How can I help my grandchildren invest for their futures?

  • Leanne Lancaster
  • 29 August 2023
  • 15 minute read

Grandchildren. All of the fun, none of the night feeds. Being a grandparent can be one of life’s most rewarding roles and also comes with a reputation for spoiling the grandchildren. And it’s not all about sweets and toys.

Our recent Family and Finances Report found that 65% of those over the age of 60 plan to pass on their wealth to their children or grandchildren after they die, and a further 17% plan to share their wealth during their lifetime. With mounting education costs and house prices, helping your grandchildren could be rewarding in more ways than one.

Download our Family and Finances report

So, it could be a case of ‘move over bank of mum and dad’.

If you do decide to help out your grandchildren financially, it’s wise to think about how to do this in a tax efficient way. After all, it’s better to give your money to your grandchildren rather than HMRC.

Think about inheritance tax

If you give away more than £325,000 in total and then die within seven years, the people you gave the gifts to may have to pay inheritance tax. And this could be problematic if they’ve already spent their gift. 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.

Read more: A guide to inheritance tax rules and exemptions

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 make 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’re 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 specific needs. These can be complex vehicles to understand and use, so we strongly recommend you take legal and financial advice.

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.

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 is currently £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 25% to recover the bonus already given.

Savings accounts

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 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.

Again, we suggest that you take advice before pursuing this option.

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 automatic 20 percent tax relief built into the system, would increase 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.

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. Although they may be frustrated that they can’t access the money until they’re aged 57 or more (and possibly beyond that age in the future), when it’s time for them to retire, they’ll be able to withdraw 25% of their fund tax free.

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.

One clear theme from our Family and Finances Report is that there seems to be reluctance to discuss estate planning and the passing on of wealth with children and grandchildren.

Only 50% of respondents aged 60 and above (all of whom have at least one child) said they discuss inheritance with their children; and only 35 percent have told their children exactly what their will includes.

Similarly, only 33 percent of respondents aged between 30 and 59 (all of whom have at least one living parent) know all the details about the wealth that will be passed to them.

Around one in five (19 percent) of respondents aged 60 and above say they’ve never spoken to their children about their finances. When asked why, 28 percent cited that they ‘don’t think it’s their business to know about my finances’ while 36 percent said they wanted their children to be financially independent. Some 17 percent admitted they don’t feel comfortable talking about money with their children.

But as we get older, it’s vital to consider inheritance tax, and take sensible steps to maximise our potential legacies and to make sure our loved ones are aware of our wishes.

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. At Schroders Personal Wealth, one of our principles is to have regular reviews with an adviser. But most of all, talk your intentions through with your family.

Important information

The value of investments and the income from them can fall as well as rise and are not guaranteed. The investor might not get back their initial investment.

Fees and charges apply.

Tax treatment depends on the individual circumstances of each client and may be subject to change in the future.

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 do down as well as up. The benefits of your plan could fall below the amount(s) paid in.

Any views expressed are our in-house views as at the time of publishing.

This content may not be used, copied, quoted, circulated, or otherwise disclosed (in whole or part) without our prior written consent.

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