Blacktower View: Saving for grandchildren
Many British pensioners enjoy healthy private pensions or have built up substantial savings that more than meet their day to day living needs. It is not surprising then to learn that about one in ten elects to gift part of their savings to their grandchildren, with average gifts amounting to £15,000 according to a survey by OneFamily.
With the majority of the UK population having mortgages and other debts, it is becoming more and more common for grandparents to fund their grandchildren’s education costs rather than their parents. In doing so, they are not only helping their family, but they could also be benefitting from useful UK inheritance tax (IHT) breaks. The amount that you can hold in your estate before IHT is payable is presently £325,000. Taking high UK property prices into consideration, it is no longer the super-rich who have potential IHT problems to consider. If your assets are above the threshold level, then making one off or regular gifts to your grandchildren is worth considering.
IHT rules state that you can make regular gifts out of income so long as in doing so your own quality of life is not affected. For example, if your guaranteed pension income was £50,000 a year and your living expenses amounted to £35,000 a year then in theory you could make an annual gift of up to £15,000. Gifts of this nature are then regarded as being outside your estate for IHT purposes after seven years having elapsed from making the gift(s). In addition, there is the annual exemption rule whereby you can make gifts of £3,000 each year without any test against your ‘income’. If you have not used up the allowance in any one tax year then you can carry it forward a year and gift £6,000, in total, in that particular tax year.
Whilst making gifts of this nature would help your family and your own IHT issues, it is important to factor in other potential expenses such as long-term care costs for yourself, or unexpected medical expenses. You would not wish a situation to occur whereby you were paying for your grandchildren’s’ school fees but then had to tell them that you couldn’t continue as your own expenses had escalated. It is essential, therefore, to seek professional advice to create a plan for your savings and potential unforeseen expenses.
When to start gifting
Due to current IHT rules, it is best to start gifting as soon as financially possible. If you have a newly born grandchild, then gifting money into a savings plan that will fund or partially fund their future education costs is a great way of helping them. Rather than merely depositing the funds into a bank account, investing the money into a managed fund is a great idea as it could be 10-20 years before the money is actually needed. This way, you would expect the growth of the savings investment scheme to outperform cash rates and inflation. There are a number of companies that offer these savings schemes and with the right advice, you can really make a difference to your grandchildren’s futures.
The content of this article is for information purposes only and does not constitute advice.