Thoughts for the holiday season – Part 2: Why a pension is the best gift for your grandchildren
Loving grandparents across the UK are painfully aware that their grandchildren are trying to build a secure financial future in conditions that bear little resemblance to the ones they experienced. Salaries don’t stretch as far. State pension age is creeping up. House prices have rocketed and it takes significantly longer to save a deposit to get on the property ladder. Many grandparents want to help but are unsure how best to.
A different system
Faced with these challenges it makes sense to support the widest financial security gap your grandchildren face, a pension. They are saving into something that barely resembles what you had. Final salary schemes have all but gone from the private sector. Where your pension may have been part of the psychological contract between employer and employee, theirs is a pot they’ll have to likely have to build and manage themselves. And many face a stark choice between saving into a pension or for a property deposit.
Why a pension makes sense
At first a pension may seem like an odd gift for a grandchild. There’s nothing to unwrap and they won’t be able to touch it for the next fifty-odd years. And that’s the point. Pensions shine at building long-term financial security in three ways. First, the contribution attracts tax relief even though the child pays no tax, so every pound you put in is topped up by the government before it’s invested. Second, the money is locked away until at least age 55, rising to 57 from 2028, so your grandchild won’t be able to blow it on a fancy car or similar. And third, time is on their side. Start early enough and compound growth will have fifty plus years to work its magic.
How to open a pension for your grandchild
A parent or legal guardian can open a pension for the child. After that anyone can pay in. Grandparents, aunts, godparents, whoever wants to help.
You can contribute up to £2,880 a year and the government adds basic rate tax of up to £720, taking it to £3,600. That £3,600 is the maximum annual total from everyone combined, not the amount each of you can give. So ask the parents what they’re already paying in before you set up a standing order. If exceeded, the provider has to refund the surplus and square the tax relief with HMRC.
There are advantages for estate planning too. Regular gifts made from surplus income, rather than capital, sit outside your estate straight away, with no seven-year wait. The conditions are strict for these kinds of payments. The gifts must form a genuine pattern, come from income, and leave you able to live as you did before. Keep records, because it’s your executors who’ll have to prove it.
Giving while you're here
While some grandparents enjoy watching their grandchild’s financial security grow during their lifetime, others feel more comfortable keeping their position private and providing through a will. Both approaches are reasonable, but what isn’t is giving away money you might need. Later life can be expensive, and care is more expensive still. Generosity that leaves you short at eighty-five isn’t generosity. It’s a problem deferred, handed to the same people you were trying to help.
Get in touch
Wanting to support your grandchild’s long term financial security is a good instinct which deserves some planning behind it. A pension is one way to do that, though rarely the whole answer on its own. So come and talk to us. We’ll help you find the approach that suits your grandchild and leaves you comfortable too