This article is for general guidance only and is not financial or professional advice. Any links are for your own information, and do not constitute any form of recommendation by Saga. You should not solely rely on this information to make any decisions, and consider seeking independent professional advice. All figures and information in this article are correct at the time of publishing, but laws, entitlements, tax treatments and allowances may change in the future.
More than half of 16- to 25-year-olds are worried that they’ll never be financially secure, according to The Princes’ Trust, and becoming a first-time buyer is possibly the most expensive it has been in 70 years.
Grandparents with cash to spare are often willing to help; according to Saga’s own research, 29% have gifted or lent grandchildren money, rising to 64% amongst the over 85s.
But, given there are many ways to help give your grandchild a financial boost throughout adult life, how can you do it the most effectively?
The most important thing is to think about how much you can afford, and how often you’ll like to give – making sure you’re not over-extending yourself financially is key and, remember, even a few pounds gifted regularly over the years can build into a significant pot.
If you plan your giving carefully, you can not only benefit them, but yourself as well – and could even make them a millionaire in the process.
If you’ve set your heart on building a serious nest egg for your grandchild, the best approach is to get started as early as possible and choose the right kind of account for what you want to achieve.
“While cash savings might struggle to keep up with inflation, investing can supercharge wealth accumulation over time, bolstered by the magic of compounding returns,” says Myron Jobson, Senior Personal Finance Analyst, Interactive Investor.
“Whilst the stock market provides no guaranteed returns, your money will earn interest both on what you’ve saved and the interest it earns along the way.”
It’s important to remember that the value of investments can go down as well as up, so if you’re looking for more stable returns, cash is a good option.
It’s also key to think about investing in the most tax-efficient way, which makes both Junior ISA and junior pensions savvy options to improve your grandchild’s long-term financial security.
Children have their own yearly ISA allowance – currently £9,000 – and anyone can pay into a Junior ISA on their behalf. No tax will be paid as the money grows, or when withdrawals are made – but it can’t be accessed until the child turns 18.
These accounts need to be opened by a parent or guardian with parental responsibility, but they’re a great option for grandparents who don’t want the cash to be raided while their grandchildren are still little.
If you’re worried about them splurging it as soon as they can, data from financial services company Hargreaves Lansdown suggests the vast majority keep the money invested in either an adult ISA or Lifetime ISA, with just 16% withdrawing something when they reach 18 years old.
There are two types of Junior ISA (and they can hold two in total):
Cash Junior ISA: this pays a specified rate of interest, like an ordinary child’s saving account. Shop around for the best offers.
Stocks and Shares Junior ISA: money saved here can be invested in stock market-linked investments such as shares, funds or investment trusts.
Saving for a child’s pension may seem beyond the call of grandparental duty – but who better to fly the flag for long-term financial security?
You can give up to £2,880 tax efficiently into a Junior SIPP (self-invested personal pension) each year, and the government automatically tops up any pension contribution by 20% (through tax relief) bringing the total annual addition to £3,600.
You won’t be able to open the pension for them – again, that will fall to the parent – but you can contribute into it.
The pension transfers to the child when they reach 18, but they won’t be able to access the money until they’re at least 57 (the normal minimum pension age is currently 55 but rises to 57 in 2028).
Sarah Coles, Head of Personal Finance at Hargreaves Lansdown, illustrates how you might get to £1m with a combination of Junior ISA and SIPP:
However, your grandchild will have to wait a while before they can access their pension and would need to avoid the temptation of touching the money in their ISA account to hit that total. This also assumes 5% growth per year, and you could get back far less than that.
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Another popular way to save for grandchildren is with Premium Bonds. These give your grandchild the chance of winning a £1m prize in its monthly draw – you can invest as little as £25 and hold up to £50,000 – and your money is backed by the government too.
While Premium Bonds pay numerous prizes every month (ranging from £25 to £1m) you won’t earn any interest and prizes are not guaranteed. In fact, the odds of winning any prize are 21,000 to one for every £1 bond you own. “So, if you don’t win enough, you’ll be losing money after inflation,” says Coles.
Of course, your priority is likely to see your grandchild settled financially, with a roof over their head, rather than being a millionaire on paper.
If you want to help an older grandchild raise enough for the typical first-time buyer deposit, (currently £53,000, according to Halifax) you may be able to just gift them some of the money needed.
But if you want to help over time, as well as be a little more tax efficient, you could contribute into something called a Lifetime ISA (LISA).
Any first-time buyer aged 18-39 can save up to £4,000 every tax year into a LISA which is specifically for a first home (or later life, with withdrawals allowed post-60). The government will then add a 25% bonus on top - to a maximum of £1,000 per year.
Saving and investing for children can be a great way to set them up for the financial responsibilities of adulthood, and many grandparents are happy that they are able to help.
But for wealthy grandparents, giving money to grandchildren can also be helpful if you think your family might have Inheritance Tax (IHT) to pay when you pass away.
Ian Dyall, Head of Estate Planning at financial services firm Evelyn Partners, explains: “Many older savers like to make financial gifts to their grandchildren to give them a good start in life, and these could be straightforward cash gifts or payments into a Junior ISA, pension or trust.
“But not everyone appreciates that these gifts can also be IHT-efficient if the donor's estate is likely to become liable for IHT.
“This is because lifetime gifts that meet certain rules reduce the size of the estate, meaning sums that would have become liable for IHT do not.”
In practice this can be the difference between a grandchild getting £10,000 while you’re still alive, or £6,000 after you’ve died and IHT is deducted.
Each year you can give away lump sums worth £3,000, which are instantly IHT free – roughly the maximum contribution you can pay into a Junior SIPP – but amounts more than this will be considered something called ‘potentially exempt transfers’.
This means the IHT payable on them gradually reduces over time – becoming totally tax free after seven years.
However, it’s also possible to give away as much ‘surplus income’ as you like and not incur any IHT charge – this can be a helpful tool if you’re making monthly payments into a grandchild’s saving or investment plan.
But, crucially, you must be able to demonstrate this gift is extra money (from income, not savings or other capital) that you don’t need to maintain your daily standard of living.
Dyall says that not many people are using this exemption, but those that do are making a substantial saving.
“Surplus income is the income that remains after all of your outgoings have been paid: funds left over which are surplus to needs and have no bearing on your standard of living,” he adds.
“Your income includes earnings from employment and pensions, but it can also include interest, dividends and rental income.”
That means this approach does require disciplined record-keeping, but if you have an IHT liability and want to help your grandchildren regularly from spare income, it’s a tax break well worth looking into.
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