In the current financial climate the ‘bank of mum and dad’ is often needing to stay open for longer. We are seeing more and more instances of grandparents needing, and indeed wanting, to help out their financially stretched children and grandchildren.
We’ve put together six financial tips for grandparents to help guide you through these tough economic times.
Tip 1: Save tax efficiently
It’s pretty obvious that the less tax you pay on savings and investments you make for your grandchildren the better the return will be.
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This generally means using ISAs (Individual Savings Account) in the first instance.
You might not use your ISA allowance each year, leaving you free to earmark new ISA savings or investments for the benefit of your grandchildren. However, if you do save into Cash or Stocks & Shares ISAs each year, you could consider a Junior ISA for grandchildren born after 3rd January 2011.
With a Junior ISA the money is held in your grandchild’s name, although it cannot be accessed until they are 18. The money held in the Junior ISA can be split between Cash and Stocks & Shares investments, in a similar way to an ‘adult’ ISA, although the maximum annual contribution is lower at £3,600.
The main benefit of a Junior ISA is not necessarily the tax efficiency of the savings, after all most children are not tax payers, but that at 18 the capital can be rolled over in full into an ‘adult’ ISA. Alternatively, because it is in the name of your grandchild they could just go out and spend it!
For grandchildren born too early to take out a Junior ISA you could contribute to a Child Trust Fund (CTF) on their behalf. Again Cash and Stocks & Shares elements are available and the maximum contribution is the same as for a Junior ISA .
Tip 2: Think carefully about where you take capital from & don’t leave yourself short
If you plan to take a lump sum from your savings or investments to gift to your grandchild, or use to meet capital expenditure, think carefully about where you take it from.
As a general rule try to avoid taking capital from tax efficient investments such as an ISA, certain National Savings & Investments products or a Pension (in the form of a tax free lump sum).
Be wary too of taking capital from investments at a time when stock markets a depressed, remember the old rule, buy low and sell high! Be careful too about penalties on certain investments or charges on notice savings accounts.
Taking money from savings could work well, especially at a time of low interest rates, although be careful not to leave yourself exposed by having too little readily accessible capital.
Before you make any gifts think about your capital needs both now and in the future. What if interest rates or investment returns fall further, will you need more capital to maintain your income? If so, can you afford to give it away now?
Single contribution
£3,600 gross paid as a one off contribution when child is less than one, growing at 7% per year, assuming an annual charge 1% would be worth, at 65, £154,000
Regular contribution
£300 gross per month paid from when the child is less than one until retirement at age 65, assuming growth of 7% per annum and a 1% annual charge would produce a fund at retirement of £2,710,000
Notes
Growth rates are not guaranteed and for illustrative purposes only. Charges could increase during the term of the contract
Tip 3: Consider paying into a pension for your grandchildren
Yes, we know you might not even have retired yet, so paying into a pension for your grandchildren might seem like a crazy idea, but bear with us, it might not be so mad after all!
Tax efficient saving and investing is all well and good but making a pension contribution for your grandchildren actually gets money added to it by the taxman.
Unless your grandchild earns more than £3,600 per year, which is unlikely, the maximum that you can pay in to a pension for your grandchild is £2,880 per tax year. But, and this is the main incentive here, the tax man will top this up by £720.
This is essentially free money, for everyone else tax relief on pension contributions is simply a way of you getting back tax you have paid, however for your grandchild they have not had the income in the first place and therefore paid no tax.
There are of course disadvantages, for example once it has been paid into a pension the money can’t currently be accessed until age 55. It therefore cannot be used to help fund the costs of university or a first house deposit.
However, the long term benefits could be huge. The table to the right shows a couple of examples of how beneficial early pension planning on behalf of grandchildren can be.
Tip 4: Make a will
This is definitely one of those jobs that many of us just don’t get round to doing.
Making a will is the only way of guaranteeing that your assets will be distributed in accordance with your wishes. If you have not made a will the rules of intestacy apply and may mean that your grandchildren may not benefit from your estate.
If you plan to leave assets to your grandchildren making a will is the only way of ensuring they benefit in the way you want them to.
Annual exemption
Gifts of up to £3,000 per year are immediately exempt from IHT.
Gifts made in respect of a wedding or civil partnership
Parents can each give up to £5,000, grandparents, and indeed great grandparents can gift up to £2,500, all of which are immediately exempt from IHT.
Small gifts
Small gifts of up to £250 can be made to as many people as you like within a tax year and be exempt from IHT.
Tip 5: Making gifts can help to reduce Inheritance Tax
If your estate is valued above the IHT (Inheritance Tax) threshold, making gifts to your grandchildren could help to reduce this liability.
HMRC allow certain gifts to be made which are then immediately outside of your estate for IHT purposes, some examples are shown to the right.
Furthermore, any gifts you make from surplus income are again immediately outside of your estate for IHT purposes.
Finally, gifts over the HMRC limits or not made out of surplus income will fall outside of your estate if you survive for seven years.
Gifting can therefore can significantly help to reduce your IHT liability, although you will obviously lose control of the money.
Tip 6: Get your children to read our blog!
Bev Stoves, one of our Independent Financial Advisers has written an article containing six financial tips for parents.
Naturally we’d suggest it is a “must read” for all parents, but in all seriousness the more help your grandchildren have financially, the better set up they will be for the challenges that life can throw at them.
You can find Bev’s blog by clicking here.
Next steps
Deciding when and how to make gifts to your grandchildren can be tricky, as can saving or investing for them.
It is probably harder than when you do it for yourself as there a other things to consider, for example IHT, where do you take capital from if you want to give it away, whose name should investments be held in, to name three added complications.
Our team of Independent Financial Adviser are experienced in this area. If you would like the benefit of their advice, or have a question about this article call one of our team today on 0115 933 8433, alternatively enquire online or email info@investmentsense.co.uk
Note: The Financial Services Authority does not regulate Will writing
