Empowering grandchildren with a foundation upon which to build an independent and stable life
There is an undeniable nobility in the desire of grandparents to provide for their family’s future. The notion of passing wealth down through the generations is as much about love and foresight as it is about finances. For many, it is an opportunity to empower grandchildren, giving them a foundation upon which to build an independent and stable life.
But how does one best approach this admirable goal? The options for gifting are vast, each with distinct merits and drawbacks. Should the assistance come in the form of a lump sum financial gift, or would a structured monthly allowance better suit the needs of the recipient? These are critical questions, and the answers require thoughtful planning.
Understanding the timing and tax considerations
Timing is everything when planning generational wealth transfer. Knowing when to step in can make a significant difference in how effective a financial gift might be. One must also address the implications of taxes – Inheritance Tax, in particular, can have far-reaching ramifications if unaddressed.
For grandparents, gifting money at an earlier stage comes with the added advantage of potentially reducing the tax burden. Under current rules for the 2024/25 tax year, a grandparent can gift up to £3,000 annually without this amount contributing to the value of their estate. For a couple, this allowance doubles to £6,000 per year, giving families a valuable opportunity to plan ahead.
Exploring Lifetime ISAs
If your aspirations include helping a young relative save for their first property, a Lifetime ISA (LISA) might be worth considering. Though it is the recipient themselves who must open and manage the account, grandparents can gift money to fund its growth. This financial product is ideal for individuals aged 18 to 40, particularly when pursuing the dream of homeownership.
The advantages of LISAs are significant. Up to £4,000 can be deposited annually, with the government adding a 25% bonus – a neat reward of £1,000 for those maximising their contributions. However, caution is necessary. Withdrawals for purposes other than a first home purchase or retirement come with a 25% penalty. This tax charge often outweighs the initial bonus, making it less appealing if funds are likely to be needed for other uses.
Starting early with Junior SIPPs
Although pensions often don’t come to mind until later in life, starting early can have great benefits. A Junior Self-Invested Personal Pension (JSIPP) can be opened for a child from birth, allowing decades of potential growth. Grandparents and parents alike can make ‘third-party contributions’ directly into the plan, securing the same tax relief that the beneficiary would receive if they contributed themselves.
Currently, contributions up to £2,880 per year can qualify for 20% tax relief, growing to £3,600 gross. Even children with no earnings can benefit. For higher taxpayers, additional relief may also be reclaimed, enhancing the overall tax efficiency of these contributions. However, it’s essential to recognise that these funds are locked away until the recipient reaches their pension access age – currently set to rise to 57 in April 2028.
Considering trusts for greater control
For those who desire more control over how their legacy is managed and distributed, setting up a trust might be a suitable option. Trusts are flexible tools within wealth management, catering to a variety of needs. Whether the goal is to fund education or provide a long-term financial safety net, a trust can ensure that your wishes are followed.
However, it’s important to note that trusts fall within a complex area of financial planning. The specific structure chosen must align with your intentions and financial circumstances. We provide professional advice to help navigate this terrain, ensuring the approach you take is tailored to your family’s unique needs.
Making the right financial choices
Grandparents wishing to support their descendants have a wealth of options available. Whether through gifting funds, savings schemes or setting up trusts, each choice carries its potential advantages. By carefully considering timing, tax implications and the needs of your family, you can make informed decisions that leave a lasting impact.
