12 min read

How can you contribute towards your grandchildren’s future?

‘It takes a village to raise a child’, so the old saying goes. And it’s certainly true that having the support of family around you is invaluable for many parents. Grandparents bring much more to the table than just free babysitting and fun days out – they can often be a source of emotional support for parents, and a font of knowledge on how to get a cranky baby to sleep or a fussy toddler to eat. But inevitably one of the biggest tolls on parents is the sheer financial cost of children – and grandparents can help here too.

Grandparents talking to their two grandhild

Why are parents struggling with child costs?

Raising a child is expensive. According to a study by Loughborough University it costs couples £150,753 to raise a child in the UK to 18 years of age, £183,335 for single parents.

The most expensive years are between the ages of one to four, as babysitting and childcare costs command a big chunk of parents’ budgets. But later in the child’s life the cost of education is also a factor, especially considering the average university tuition fee was £9,250 in 2018/19 according to The Complete University Guide.

Grandparents are helping more and more as they are worried about the future for their grandchildren. OneFamily’s research found that nearly half of all grandparents are worried about their adult grandchildren’s financial future. Especially whether they will earn enough money and if they will be able to get on the housing ladder.

When your grandkids are young

Savings accounts for grandchildren

If you are looking to save a little regularly for your grandchildren’s future, there are a number of options you can choose from. Saving from a younger age will enable you to save tax efficiently and build up a nest egg for your grandchild for when they need it most. Remember saving a little often soon adds up.

Keep in mind that the tax advantages depend on your individual circumstances and can change in the future.

Traditional savings accounts

The most common financial product used by parents and grandparents is a simple savings account which they set up and pay into themselves. However, interest rates are pretty low at the moment, so if this is the route you want to take, shop around for the best deal.

If you are happy to lock the money away for a few years, you could get better returns on stocks and shares ISAs or Bonds. However, stocks and shares go up and down so you could get back less than you invested.

Junior ISAs

A Junior ISA is a tax-efficient savings account which replaced the Child Trust Fund in 2011. A Junior ISA lets you pay in up to £4,368 in the 2019-2020 tax year. You can choose either one Cash Junior ISA, one Stocks & Shares option, or a combination of both.

Cash Junior ISAs work a lot like a typical bank or building society savings account, with the cash growing due to interest, offset by account charges. The Stocks & Shares product invests in stock markets to try to give a better rate of return. This also comes with additional risk. Although this is not guaranteed and investments are subject to the market fluctuations so the child may get out less than you invested.

There's no income tax or capital gains tax to pay on the final amount in the Junior ISA pot. The child can access only once they reach 18. Only parents can open a Junior ISA for their child, but grandparents, friends and other family members can pay in.

If the grandchild was born between 2002 and 2011 they may well have a Child Trust Fund that you can invest into. There are an estimated six million still in use, with as many as one in six Child Trust Funds having been left dormant. Child Trusts Funds are tax efficient savings accounts originally created by the Government to ensure that children arrive at adulthood with some savings. Find out more about Child Trust Funds and how to locate one here.

When they’re an adult

How much can a grandparent gift a grandchild?

You might think giving a lump sum cash gift is the most straightforward way to support your loved ones. However, when grandkids are grown up, careful planning is required to avoid landing them with a tax bill.

Giving money to your grandchildren regularly and in smaller amounts is one possible way to minimise your Inheritance Tax.

Under current HMRC rules you can gift up to £250 to as many people as you want each tax year. You also have a £3,000 'annual exemption' allowance. But be careful - you can't give £250 and part of your £3,000 'annual exemption' to the same person.

And if you didn’t use your exemption in the previous year, you can carry it forward for one year, giving you £6,000 which is exempt from Inheritance Tax.

As long as you live more than seven years from when you make a gift like this, your grandchildren or family typically won’t have to pay inheritance tax on it when you die. Bear in mind that tax rules change, so this information may not be accurate in the future. Up to date tax rules can be found on the HMRC website.

Could a lifetime mortgage help?

OneFamily’s research has revealed that grandparents are most likely to fund financial help from their own savings (40 per cent). A little over 70 per cent can do this without any impact on their own financial wellbeing.

However this isn’t feasible for all UK grandparents. For those that don’t want to dip into their personal savings, a lifetime mortgage is one possible solution.

Lifetime mortgages enable homeowners over 55 to release cash from their property. For asset rich grandparents it’s one way to help their cash-strapped adult grandchildren and gift them a significant sum of money. Either towards university fees or a deposit for a first home.

Some grandparents choose this option as a way of bestowing their inheritance upon family members. But as with all financial decisions, you should seek the opinions of an independent financial adviser before taking action.

You can find out more about the OneFamily lifetime mortgage offering here.

Note: We take care to ensure Talking Finance content is accurate at the time of publication, individual circumstances can differ so please don’t rely on it when making financial decisions.