Retirement: 6 things you must think about before giving money to your grandchildren


Series on money

The introduction of Pension Freedom has combined, with the rising cost of university fees and house prices, to mean that a growing number of grandparents are giving money away to their grandchildren.

Indeed, according to new research from LV=, the average grandparent has already given away £1,633 and plans to top this up with a further £2,938 in the future, with 1 in 20 having already given away over £10,000.

Of the grandparents who have helped their grandchildren 25% took the money from their pension, potentially impacting on their ability to make ends meet later in life.

If you have grandchildren the temptation to help them out financially could be very strong, but before you do, here are six things you must think about.

#1: Can you afford it?

Whilst it might seem obvious, it is vital to carefully consider whether you really can afford to give away a lump sum of money.

Will giving away some of your pension, investments or savings reduce the quality of your lifestyle now? Or even worse, mean you can’t make ends meet?

It isn’t just about the here and now either, you could easily live for another 20, 30 or even 40 years and perhaps need some form of care, which the money you gave away could have helped to pay for.

Careful planning is the key to making sure you don’t go without in years to come because you gave up too much money now. Our advisers have access to sophisticated cashflow modelling tools, which will help provide you with more information about the money you will need in the future and therefore how much you can safely afford to give away now.

#2: Where should you take the money from?

Assuming you can afford to give away a lump sum you need to think about where it should come from.

As a general rule of thumb we would suggest taking it from the least tax efficient place and where the return is the lowest.

Everyone’s circumstances will be different, so we would always recommend taking independent advice before any lump sums are withdrawn from savings or investments and given away.

#3: Think twice before taking money from your pension

Since the introduction of Pension Freedom it’s clear many people have taken lump sums from their pension for a variety of reasons, including giving away to their grandchildren.

We would suggest thinking carefully before doing so. Why?

Firstly, pensions are a tax-efficient place to invest, whereas you may have other savings and investments which aren’t. Secondly, taking money from you pension could trigger an income tax bill (unless of course it is from the tax-free lump sum). Finally, accessing your pension could mean you incur additional costs or charges.

Again, careful planning and independent advice can help you make the right decision.

#4: When to make the gift?

37% of the grandparents surveyed by LV= said one of the main reasons they made a gift was so that they would live to see their grandchildren enjoy it.

Of course everyone’s circumstances are different and you will have your own reasons for considering whether or not to make a gift. But it’s clear that many people prefer to do so whilst they are alive, assuming of course they can afford to do so, rather than waiting until they die.

#5: Will you have to make other gifts to even things up?

Making a gift to a grandchild is one thing, but will you feel compelled to give other grandchildren an equal amount? What about grandchildren who are not even born yet?

Again, this needs to be factored into your planning. One gift now might not be too painful, but to make identical gifts in the future to one, two, three or even more grandchildren might start to impact on your lifestyle and your ability to make ends meet.

#6: A way of reducing your Inheritance Tax bill?

One of the advantages of giving money away now is that it means you will get to see the benefits it gives to your grandchildren. It could also help to reduce the amount of Inheritance Tax (IHT) paid when you die.

IHT is complex and professional advice should always be taken, but there are certain annual exemptions which allow you to give money away each year and for that amount to immediately be excluded when calculating the IHT due on your death.

We’re here to help

If you are planning to give money to your grandchildren we are here to help ensure you make the right decisions, at the right time, without leaving yourself financially exposed in the future.

Call Sarah or Bev today on 0115 933 8433 or email