The Bank of Nan and Grandad

July 2020
grandparents picnic
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Grandparents play an increasingly vital role in the economy – frequently providing childcare for grandchildren as well as making a more direct financial contribution. From paying for driving lessons and a first car, to university fees and getting on the housing ladder or even saving for retirement there are many ways grandparents can help their youngest offspring…

1. Pensions

It might not be the coolest of suggestions (nor will it be likely to win you brownie points from the grandkids in your own lifetime!) but a regular pension contribution for your grandchildren really adds up, here’s how:



Gifts made regularly from surplus income are immediately out of your estate for Inheritance Tax purposes, as are gifts of up to £3,000 pa.

The growth on a regular contribution benefits from the effects of compound interest.

Contributions can start from as little as £20 per month gross.

Contributions up to £2,880 automatically receive a government top-up of 25% (even if they’re a minor and have no earnings) – higher amounts may be possible if the child has earnings.

Funds can’t be accessed until age 55 at the earliest (so less likely to be misspent!).

Access to the funds from age 55 if you need them

2. Child Trust Funds (CTFs) and Junior Individual Savings Accounts (JISAs)

Grandchildren born between 1 September 2002 and 2 January 2011 – were given an initial £250 voucher from the government to open their Child Trust Fund (CTF) account. CTFs were replaced by Junior ISAs (JISA) in 2011 (albeit with the government £250 voucher done away with) and existing CTFs can be converted into JISAs, but you can’t hold both simultaneously. You can still contribute up to £9,000 this tax year into an existing CTF.

JISAs can only be set up by a parent or guardian but anyone can contribute to them subject to the annual limit of £9,000 in 2020/21. One significant drawback with both savings accounts is that the child can manage the account from age 16 and can access the funds from age 18 (and your average 18-year-old might not make the financial choices you’d like them to!). You could consider earmarking money in your own ISA account for a grandchild (the annual contribution limit of £20,000 is fairly generous), but you can’t give the money to the child within an ISA wrapper so the money would have to be withdrawn and gifted.

3. Bare Trusts

Put simply, under a bare trust you (the trustee) make a gift which is held for a specified beneficiary (your grandchild). Bare trusts can be set up by anyone. The beneficiary becomes entitled to the trust money at 18, but up until that point the trustee can manage the investments held within it, including withdrawing money – as long as it is for the benefit of the beneficiary, such as to pay school fees. Bare trusts have no limits to the amount that can be paid in which means they are often used to manage inheritance tax (IHT) liabilities – some gifts may be outside of your estate immediately whereas most larger gifts take 7 years to leave your estate. Please bear in mind that there are many different kinds of trusts and ways of using them, most too lengthy to explain in this article.

4. Investment Bonds

These are investments which are taxed as life assurance policies. They can be gifted by the original owner to another person either within or outside of a trust. They are ideal for basic rate taxpayers as the insurance company accounts for the equivalent of 20% income tax, leaving no further tax to pay if the beneficiary or owner of the policy is a basic rate taxpayer (and the averaged gain on the policy falls fully within the basic rate band when added to their income). Grandparents who expect to be higher rate taxpayers in retirement, often use these to accumulate funds over which they have full control with a view to gifting the bonds to lower taxpaying family members. The advantage of these arrangements are that the child does not automatically take over at 18 (unless held within a bare trust) but doesn’t have to wait till their mid-50s, so funds can be gifted at the most appropriate time in a potentially tax efficient manner.

A Word of Caution

Making gifts of cash (whether regularly or as a one-off) can have tax implications. As mentioned above making regular gifts out of surplus income can reduce your IHT liability, but there may also be Capital Gains and Income Tax implications for you and your grandchild. If the sums you are considering gifting are significant or your financial affairs are not straightforward you should seek professional advice.

Heather Lewis
Marketing, LEBC

Please remember, no news or research item is a recommendation or advice to buy. LEBC Group Ltd is not responsible for accuracy and may not share the author’s views. If you are unsure of the suitability of any investment or product for your circumstances please contact an adviser. All investments can fall as well as rise in value so you could get back less than you invest. The Financial Conduct Authority does not regulate estate planning, tax advice, wills or trusts. Tax rates and allowances may change in future.

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