Without consciously being aware of it, there was unconditional love and acceptance, evidenced in just one example by a weekly treat of liquorice from one of my grandfathers.
It should not therefore have come as a surprise when many years later, as more of my clients retired and became grandparents, client meetings needed to be extended by a good 20 minutes for me to be told endearingly about their grandchildren – all loveable even if also exhausting!
This very special intergenerational relationship, rooted in the most powerful but subtle blood ties, results in grandparents often wanting to be more generous with their grandchildren than perhaps even with their children. Expressing such deep affection through their finances will often take the form of paying school fees or further education costs, a deposit on a first home or help with buying a first car. However, it is not uncommon that such financial help happens late in the day when there is little time to plan other than to question how much can be afforded. Forward planning by investing in a Junior ISA (JISA) can provide such help very much more efficiently. A Junior ISA is in essence no different to a normal adult ISA, except that the maximum annual investment allowed is currently £9,000 rather than £20,000. The investment will grow tax free, and withdrawals are also free of tax.
For a Junior ISA, the child can access the funds on attaining the age of 18. For example, an investment of £750 per month (£9,000 per annum) invested in a Junior ISA, achieving say a 5% per annum investment return after charges, would generate a fund after ten years close to £117,000. Over the full 18 years of a Junior ISA, the same investment would accumulate almost £263,000.
Stakeholder pensions can also be established for children and will benefit from a basic rate tax credit, taking an investment of £2,880 to £3,600 per annum. Having said that, a tricycle might be a more welcome gift than a pension!
The use of trusts for educational purposes can also help with grandparents’ own estate planning. While there is of course the very real possibility of changes being introduced in the forthcoming budget, there is a basic principle that from an inheritance tax perspective, everyone benefits from a nil-rate band (no charge on inheritance) currently of £325,000. If such a gift is made, whether directly to an individual or into a trust, the nil-rate band is renewed every seven years – in essence, gifts that are more than seven years old no longer count towards the calculation of inheritance tax. Accordingly, a nil-rate band trust – simply a trust in which gifts of up to £325,000 are made – can be used to accumulate capital to support grandchildren later in life, while improving their grandparents’ estate planning.
While the golden years of the grandparent/grandchild relationship might perhaps be the first decade of a young child’s life, financial help later in their lives is a wonderful way to add to these very special relationships.
This article was written by Co-founder and Senior Adviser, Bob Woods.
Important information
As with all investments, your capital is at risk. The value of your investments and the income from them may fall or rise and there are no guarantees. Past performance is not a guide to future returns. Tax treatment of investments and income depends on an individual’s circumstances and may be subject to change in future. JISA, ISA and pension rules apply and may change. The content of this article is for information only and does not constitute advice. Content correct at the time of writing (September 2024).
