12 min read

How can you contribute to 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?

It costs £231,843 to raise a child in the UK from birth to the age of 21. More than the cost of the average semi-detached house, according to figures from the Centre of Economic and Business Research.

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. With costs for education topping more than £74,000, mainly as a result of significant university fees.

Grandparents are helping more and more as they are fearful 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.

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

About 30% of parents and grandparents chose a Junior ISA to save for their grandchildren. A Junior ISA is a tax efficient savings account which replaced the Child Trust Fund in 2011. Keep in mind that the tax advantages of ISAs depend on your individual circumstances and that the tax rules might change in the future.

A Junior ISA lets you pay in up to £4,128 in the current tax year. You can choose either one Cash JISA, one Stocks & Shares option, or a combination of both. The Stocks & Shares product invests in stock markets to try to give a better rate of return. 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 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 supported by the Government to ensure that children arrive at adulthood with some savings.

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.

According to OneFamily’s research, grandparents are more likely to give financial support to their adult grandchildren on an occasional basis versus giving them a lump sum (of those grandparents that help out, 32% versus 10%).

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

As stated by current HMRC rules, you can gift up to £250 to as many people as you want every year. You also have a £3,000 annual exemption. However, you can’t give both the £250 and £3,000 to the same person.

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

However the average value of lump sum given is around £15,000, and is most often used to help grandchildren get on the property ladder.

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 these guidelines 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%). A little over 70% 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 without incurring inheritance tax. But as with all financial decisions, you should seek the opinions of an independent financial adviser before taking action.

Note: Whilst 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. The opinions expressed within this blog are those of the author and not necessarily of OneFamily.