This content is for information and inspiration purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice please consult us here at Elmfield Financial Planning in Padiham, Burnley, Lancashire.
Being a grandparent brings so many joys. You get to spend more time with small children (often without so many of the responsibilities, such as the sleepless nights!). You get to be a part of fun days out and hosting big family dinners. It can be an opportunity to connect with your own child as you help him/her grapple with becoming a new parent.
Yet does the role also entail providing some financial support to your grandchildren? For many, it does. However, knowing how to best perform this role is not always clear. Below, we suggest ways that grandparents can help their loved ones to save and invest. We hope this is useful and please get in touch if you’d like to discuss your own financial plan with us over a free, no-commitment consultation.
Look after yourself
To be in a strong position to give time and money to your grandchildren, it is ideal if you are also financially stable. Preparing a robust retirement plan well ahead of time, for instance, helps you to eventually live off your pension(s) and reduces (ideally eliminates) the need to supplement your income through continued paid work. This, in turn, frees up more of your time to potentially help your child with childcare (if you want to do this, of course).
Plan your estate accordingly
How could you support your grandchildren when the time comes to pass down your wealth? Having a tax-efficient estate plan can help mitigate needless inheritance tax (IHT), potentially allowing you to leave a more meaningful legacy when you pass away.
One idea is to make full use of your annual exemption for gifts. Each tax year, you can give up to £3,000 – either as one lump sum or in different parts – without the amount getting counted as part of your estate for IHT purposes. Another option is to make regular payments to your child to help with living costs (or childcare expenses). Assuming these qualify for “normal expenditure out of income” rules, there is no limit on the amount you can contribute.
If your grandchild is getting married, then you can also give him/her £2,500 towards the big day (on top of these allowances). You can also make “regular” gifts (e.g. for birthdays and Christmas) without tax, provided these do not affect your standard of living.
Exploring using trusts with a financial adviser can also be a good option. For example, a bare trust allows you to pass wealth down to a grandchild once they are old enough (age 18) rather than simply naming them as a beneficiary in your will (which could lead them to receive large sums of wealth before they are ready).
Contribute to a grandchild’s pension
In the UK, an individual can only open a pension for themselves from age 18. However, a parent or guardian can set one up on their behalf, younger than this. By contributing to a well-crafted investment strategy within your grandchild’s pension, he/she has the opportunity to benefit from significant compound growth over the lifetime of the pension.
For instance, if their portfolio grew by an average of 6% a year over 60 years, then by a one-off contribution of £1,000 could reach nerly £33,000. Since the savings are held in a pension, moreover, your grandchild would not be able to access the funds until they reach their Normal Pension Age (currently 55 in 2022-23).
With the UK population growing and also getting older – putting greater pressure on the State Pension budget – your grandchild may be very grateful to you, in decades to come, for giving them a “leg up” towards their retirement goals. Contributing to a grandchild’s pension early in his/her life takes strain away from needing to save so much towards retirement themselves, when they eventually enter the workforce. This could help free up more of their income to put towards other important financial goals – like saving for a house.
Help towards a Junior ISA
Of course, your grandchild is likely to have financial goals well before their eventual retirement such as saving for a mortgage deposit, university or starting a business. Here, you could help contribute to his/her Junior ISA as a tax-efficient way to help them save and invest. In 2022-23, up to £9,000 can be put into a Junior ISA each tax year. All of the dividends and capital gains generated inside it will be tax-free. The funds can be held in cash or invested into assets such as equities and bonds.
Bear in mind that, whilst cash may appear “safer”, it will likely not beat inflation between now and when your grandchild turns 18 (i.e. the age from which they can start accessing the funds). Building a Junior ISA investment portfolio – perhaps with the help of the grandchild’s parents – opens up more opportunities for inflation-beating growth. However, you need to craft your strategy carefully – ensuring appropriate diversification. A financial adviser can help guide you through the complex decisions involved in building an effective portfolio.
Invitation
If you are interested in starting a conversation about your own financial plan or investments, then we’d love to hear from you. Please contact us to arrange a free, no-commitment consultation with a member of our team here at Elmfield Financial Planning in Padiham, Burnley, Lancashire.
Reach us via:
T: 01282 772938
