Financial help from grandparents

So what can grandparents do for grandchildren?

Adhoc gifting

For birthdays, Christmas and other gifts, everyone has an annual exemption of £3,000 from IHT.  And if it is not used, it carries forward for one tax year only, enabling you to gift away up to £6,000 IHT-free

Funding university/schooling costs

To encourage families to create an investment pot for children for costs like university, the Junior ISA (JISA) was launched in 2011.  If the child was born before September 2002 or after 3rd January 2011, family and friends can make contributions to a JISA – what’s great is that this includes grandparents too. Children born in between those dates have a Child Trust Fund(CTF), which works in a similar way

Just like normal ISAs, there’s a choice of stocks and shares, or cash.  The annual amount which can be saved is £3,720 (tax year 2013/14) and the JISA or CTF offers tax efficient growth potential.  The IHT annual exemption can be applied to these contributions

Access is available to JISAs and CTFs at age 18, exactly the time when university or college costs might be on the horizon.  But there is one major downside with CTFs or JISAs.  Do you trust an 18 year old to make wise spending decisions?  If there are concerns about “too much too soon” with access at age 18,  alternative investments which can be held in trust may need to be considered

Getting advice from an expert is important, since there’s more paperwork to consider here and also some other IHT implications.  But it does mean you can control how the funds are accessed, and delay access beyond age 18 with flexibility to pay out at any age

A nest egg for the future

If grandparents prefer to give a financial helping hand to  grandchildren in the later stages of their life, there are easy ways to do this too

One way to invest for a grandchild’s later life is to contribute to a private pension for them.  The earliest they have access is age 55.  Family or friends can pay in up to £2,880 every year.  And the government tops this up with tax relief, so that £2,880 becomes £3,600

So what are the benefits of setting up a pension for a grandchild?  Let’s assume that the maximum contributions have been paid into the child’s tax efficient pension for 18 years.  Growth is of course not guaranteed, but let’s assume a 3% annual growth rate – this could produce a fund of £260,000 at age 55.  A fund this size could buy an annual income of £6,500 for life, increasing at 3% each year to combat inflation, based on current annuity rates

And it is not just  grandchildren who benefit. Helping grandchildren will be a welcome boost for their parents too, as it removes some of the pressure of how are they going to be able to afford to help their children with things like Uni fees or to get onto the property ladder, especially at time when their income may be stretched with mortgage payments and other bills

There are lots of ways to give grandchildren a headstart in life, whether it’s by giving them money to spend now, a fund at age 18 or older, or a pension pot for later life.  It’s entirely up to grandparents how they help grandchildren, but I know I would have loved someone to give me a financial helping hand with some of those bigger things in life

You can find out more about saving, investing and gifting at yourfuturemoney.co.uk

As with any investment the value of a fund can go up or down and may be worth less than what was paid in.  Returns are dependent on investment performance and are therefore not guaranteed. The value of tax relief can change and is dependent on an individual’s financial circumstances. Tax rules and legislation can change.  Information is based on our understanding of law and current HM Revenue & Customs practice as at June 2013

By Dave Downie, financial expert at Standard Life