What is the best way to save for your grandchildren?
A junior ISA is one of the most popular ways of saving money for grandchildren. These accounts offer tax-free growth, meaning any interest or gains are not subject to capital gains tax (CGT). Contributions can be made up to a specific annual limit of £9,000 and the money is accessible by your grandchild when they turn 18.
The benefit of a junior ISA is that the money doesn't form part of your estate, which means it won't be subject to inheritance tax (IHT). This assumes that any gifts made to the junior ISA fall under the IHT gifting allowances or otherwise you survive for seven years from the date of the gift.
A junior SIPP (self-invested personal pension) is another a great way to invest for your grandchild's long-term financial future. Unlike junior ISAs, a junior SIPP is designed specifically for retirement savings.
The key benefit of a junior SIPP is the tax relief on contributions. You can contribute up to £2,880 per tax year and the government adds 20% basic rate tax relief, boosting the total contribution to £3,600. However, the funds are locked in until your grandchild reaches at least 57 years old. While this may seem a long way off, the advantage of starting early is the significant compound growth over the years, which could potentially result in a substantial retirement fund.
A junior SIPP can be a fantastic way to ensure your grandchild has a comfortable retirement, even if they don't have the means to contribute themselves.
Once your grandchild turns 18, a lifetime ISA (LISA) can be a valuable tool to help them save for their first home or retirement. The government offers a 25% bonus annually on contributions, which can be a significant boost. Each year, until they turn 50, your grandchild can contribute up to £4,000 and they'll receive a bonus of up to £1,000, making it an attractive option for young adults just starting to save. All interest accumulated within a LISA is tax-free too.
A LISA can act as a stepping stone toward helping your grandchild get on the property ladder or saving for their future retirement. While the funds can't be accessed until age 60 (unless used for a first home purchase), it's an investment that can grow significantly over time.
When thinking 'what is the best way to leave money to my grandchildren' it's important to consider the potential IHT implications. The amount you 'gift' to your grandchildren could be subject to IHT, depending on how much you leave and when you leave it. However, there are several ways to reduce this potential liability, such as gifting money directly to grandchildren through ISAs or trusts.
By making gifts to grandchildren within your annual capital gift allowance – up to £3,000 a year - or setting up a trust, you can reduce the value of your estate, ensuring that more of your wealth passes to the next generation without being impacted by IHT. It's also possible to use other exemptions such as regular gifts from surplus income. Any gifts made that fall outside of these allowances are subject to the 'seven-year rule,' meaning they will only fall outside of your estate once you have survived for seven years from the date of the gift.
The best way to leave money to your children or grandchildren depends on your family's wealth, your goals and your wishes for how the money should be used. There is no one-size-fits-all approach, but with careful planning, you can create a strategy that helps you achieve both your own financial goals and those of your grandchildren.
Paul Hancock is a senior wealth planner at Canaccord Wealth
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