Ask Adam: Help should I open a child pension for my grandson?

Hi Adam,

I became a grandmother for the first time last week. I want to provide a stable financial future for my grandson. But I know there are things like Inheritance Tax to be aware of.  I would appreciate your help with this. What is the best way for me to gift money to my grandson?

Hi Yasmin,

Congratulations on joining the grandparents club! What an exciting time! It’s great you’re already thinking about how to help them now and into the future.

Let’s first take a look at some of the taxes you need to be aware of before you start making gifts to your grandson.

To start with, we’ll take a look at Inheritance Tax (IHT).

The key thing to keep in mind is how much tax applies if you’re looking to gift more than £325k in total. This is the IHT threshold.

The £325k includes all your assets (home, money, jewellery, car, the money you gift your family). If anything were to happen to you, your family may need to pay IHT on any asset or assets you’ve given them above £325k. 

So, what steps can you take to gift for your grandson and make sure your family isn’t left with a hefty tax bill?

First off, you can gift up to £3,000 each tax year (April to April) to your grandson and it won't be subject to IHT should you pass away. If you choose to gift more than £3k, in any given tax year, you need to be aware that some of it could be taxed under IHT rules. That is if your total assets are valued over £325k and you pass away within 7 years of the gift being given. 

If you live for more than 7 years after giving a gift of over £3k, then whoever you gave the gift to won’t have to pay IHT on the gift. Here’s a handy guide on the IHT rules that apply to gifting which provides a deeper dive on all the ins and outs of IHT exemptions, known as PETS.

You can also gift out of your regular income, provided it does not impact your standard of living – known as surplus income. You'll want to keep a good record of your outgoing expenditures. This is because keeping a good record will show that it is a regular gift. Your family will thank you for keeping up-to-date records. They'll need them when they're asked to show evidence of your past expenditures.

Okey dokey. Now we’ve gotten the tax housekeeping cleared up, let’s focus on what options you have for gifting to your grandson.

So how can your grandson actually receive the money you’re gifting him? There are some great options available depending on what you’re looking for.

The first is a Junior ISA (which stands for Junior Individual Savings Account). You could speak with your children about creating a Junior ISA in your grandson’s name as these can only be opened by the parents or legal guardian. But once it is opened you’ll be able to contribute up to £9k each year.

There are some benefits of a Junior ISA. The first is that any money saved and / or invested is tax free. This means as the money grows, no income tax or capital gains tax needs to be paid. The second reason is that the money can’t be accessed by anyone else other than your grandson. He will be able to access the Junior ISA when he turns 18. The drawback here, is whether at 18 he will use the money wisely, but hopeful he’ll have took on board the wise money tips his grandma will give him.

Another option is to contribute up to £2,880 to a child pension for your grandson. One of the benefits of this is a 20% tax relief paid into the pension by the government on top of your contribution. So for example, if you contributed £800 to his pension, then another £200 will be added to your grandson’s pension pot. 

A drawback with a child pension is your grandson won’t have access to their pension until much later in life (in their fifties or later!). But what if you want more flexibility? A child pension can maybe seem too far away and a Junior ISA can only be set up by a parent or legal guardian.

That's where a Bare Trust comes in. It’s an investment account which can be set up by anyone – parent, grandparent, aunt or uncle. So you could set one of these up for your grandson. The money in the Bare Trust is for your grandson, meaning it can be used before he turns 18, so long as it is for his benefit. It  gives you greater  control over when you want to use the money. This flexibility allows you to put money away for him  and cover costs such as  school fees, educational trips, or music or sports coaching lessons. 

Remember that £3k yearly gifting limit I talked about earlier. Now the limit means that you’ll need to keep track of how many gifts you make to your grandson and others. You can do this by noting down the amount, date and who you gifted it to. But a more effective way of doing this would be to do it in one place and done automatically for you without having scraps of paper lying around. We’ve recently introduced on the Nosso app a gifting feature which allows you to keep track of all the gifts you’ve made and it’s done all automatically, so you can save on the paper. 

Gifting to your grandson should be hassle-free. For this reason, with all of these options you’ll be able to set up a direct debit or standing order to set up regular payments into a JISA, Junior Pension and / or Bare Trust. It’s the sort of thing which creates peace of mind and less of a need for day-to-day micromanaging of your budget and remember regular gifting can be exempt from IHT.

I hope you now have a better idea of what options are available to you.

Best wishes,

Adam.

Disclaimer: We’re an investment app, so your money is at risk and can go up or down. This blog isn’t our advice, so please don’t change your plans or buy or sell any of your investments based on it. We don’t know your money situation, your plans for the future or how much experience you’ve got. If you’re unsure you should speak to a professional financial advisor.