The next instalment of our A-Z Guide to Financial Planning focuses on the letter G – Grandchildren.
In the current financial climate, the ‘bank of mum and dad’ often needs to stay open for longer. We are seeing more and more instances of grandparents wanting to help out their financially-stretched children and grandchildren. Grandparents are often keen to contribute to grandchildren's savings and investments, as a way of rolling wealth down the generations, with many also stepping in to help with higher education expenses, or deposits for their first home.
Before kick starting or topping up your grandchildren’s savings, you need to consider all the options available and the best financial decision for both you and the child.
Child Trust Funds were phased out at the end of 2010 and replaced with Junior ISAs. However, parents who already have the trusts can still continue paying in. Against the backdrop of rising university fees and living costs, it is little surprise the Junior ISA is being described as the new way to create a US-style 'college fund'. Once a parent or guardian opens a Junior ISA for their child, anyone, grandparent, friend or family, is able to make a contribution up to the annual limit, currently £3,600, with the child being able to access the money at 18.
This may seem an appealing option to save for your grandchild; however, before rushing in to invest, it is useful to understand the pros and cons of this type of saving vehicle.
With a Junior ISA, the child will receive the money in the account when they turn 18. For some, this could be useful in order to pay for university fees, but many grandparents would prefer more control over how the money is spent and when their grandchild can access the savings. It is unlikely many parents and grandparents, no matter how much they trust their child, would be comfortable with them receiving what could be thousands of pounds on their 18th birthday.
It is worth researching alternative options for saving for your grandchildren. They may not be as tax efficient, but could you earn as much interest by opening a regular savings account with a high interest rate? Is opening a ‘bond’ (an agreement whereby your money is locked away in the account for a fixed period) a good option? If you wish to be in control of when your grandchild can access the money, both these routes might be viable, cost effective alternatives to the Junior ISA.
It is important to be aware of the implication on your own tax affairs when exploring these options, so if you have any questions, please feel free to give us a call.
It’s never too early to start a pension!
Yes, we know you may not have even retired yet, so paying into a pension for your grandchildren might seem pretty extreme; however, it might not be such a bad idea.
Obviously, any money put in a pension on their behalf would not be accessible until they retire. However, the main incentive is the tax relief available on any money paid into the pension. As such, it is an incredibly efficient way to invest in your grandchildren’s future, even if they may not benefit until they are grandparents!
According to data produced last year by Skandia, if grandparents put £240 a month (which equates to £300 a month gross contribution) into a pension for a grandchild each year for 18 years, when the grandchild reaches age 60, they could be a millionaire.
Where there’s a Will there’s a way
Another way to secure the future of your family is to make a Will, so that your assets will be distributed in accordance with your wishes. If you have not made a Will, the rules of intestacy apply, which mean that your grandchildren may not benefit from your estate.
If your estate is worth more than the Inheritance Tax threshold - £325,000 for the 2012-13 tax year - there are some important Inheritance Tax exemptions that allow you to make gifts to others and not have to pay tax on them when you die.
Gifts over the HMRC limits or not made out of surplus income, will fall outside of your estate if you survive for seven years.
There are number of options to consider if you are looking to secure the financial future of your family, but before you start writing checks, be sure that you have enough saved for yourself. Have your reviewed your own pension, decided how you want to spend your time in retirement, or put in place plans to cover the potential cost of long-term care? As more and more men and women are living longer, securing your own retirement plans first is essential.
If you have any questions, or would like to review your pension and retirement plans, please feel free to contact Retirement and Investment Solutions.