The relationship between a grandparent and a grandchild is a unique one. In many families, grandparents are already the ‘cavalry’, helping out with the school run and providing ad hoc babysitting. But with children facing financial hurdles in their future which their grandparents never did, families are now having to work together like never before to save for their children’s future.
Today’s grandchildren face the prospect of a long climb up a huge financial mountain. In 1971, the average house price was £5,632 – that’s £87,920 in today’s money. But the reality is that house prices have far outstripped inflation – today, the average house price is in excess of £250,000 (and in excess of half a million pounds if you live in London). This means they can expect that all important house deposit to cost at least £12,500 for just a 95% mortgage.
To go to university, something which was likely free for their own children, costs over £55,000 for a three-year degree when you combine tuition fees and living expenses.
So what can grandparents, together the whole family, do to work together to build a pot of money that will give kids the best possible launch into adult life?
Invest versus saving
The first question is, if you’re going to give some money to a grandchild where is it going to go? Should you save, or invest?
A lot of families will have opened a child savings bank account. But with interest rates at a record low, savings are already struggling to keep pace with inflation. Now consider how the cost of milestone events such as buying a first house or studying for a degree have far outstripped inflation, and it is easy to see that a simple savings account possibly isn’t the best option.
The Barclays Equity Gilt Study in 2019 showed that over 50 years, investing in UK shares would have returned 4.7% whereas cash would have returned 1.1%. In some years cash would have significantly outperformed equities, but over the longer term it was the other way around.
The study also showed that since 1899, money invested in UK shares and held for 10 years would have outperformed cash savings in 100 out of the 110 years, which is one of the reasons why many people choose to put their pensions and other longer terms savings into investments rather than cash.
Tip 1: Think long-term – what is most likely to deliver the best return over the next 10-18 years?
Cash-in-a-card or a gift that keeps on giving?
Last Christmas, grandparents expected to spend just under £104 on each grandchild, according to research from insurer SunLife. A lot of that will have gone on physical gifts, but a fair proportion – particularly for those families unable to get together at Christmas – will have been cash or a cheque.
Of course, we all know that need for a bit of instant gratification and the joy of spending one’s birthday money. But as a grandparent perhaps you also want to help build something more sustainable for the grandkids’ future … not least because it’s estimated that a whopping £155 million in cash is lost down the back of British sofas each year!
So, before writing that cheque or giving some cash, it is worth thinking about how you would like the grandchild to use the gift. You can’t make them save it for their Uni fees (although with Beanstalk you can gift with a note asking them to!), but you can at least make sure it doesn’t get blown on copious amounts of Haribo.
Tip 2: Ask if the grandchild has a long-term savings or investment pot to which you can make ad hoc payments.
“A penny saved is a penny earned”
This proverb is something we’ve all had told to us. If one chooses to not spend their money and save it instead, they are one up rather than one down. Simple.
But what if spending actually saved you money?
By using neat savings tricks like roundups on your purchases, or collecting free money back on your shopping automatically, you can put aside a little every week for the grandchildren without even noticing.
Beanstalk’s unique integration with KidStart means that any money you spend with over 2,300 retailers will earn money that can be shared between the children. This means you could be saving more than £250 per year, based on a recent ONS spending survey.
Tip 3: Remember a different proverb – “little and often fills the purse”!
Create a legacy
A recurring preoccupation for many grandparents is Inheritance Tax and getting their affairs in order. Giving little and often (yes, that again!) can not only help you reduce or avoid any IHT liability, but it can make a substantial difference to the next generation and the start they have in life.
Each grandparent can gift up to £3,000 in any one tax year, exempt from IHT. This balance can be carried forward to the following tax year, so if you don’t give away the full allowance of cash gifts in one year, you can make it up in the next (although it cannot be carried forward into a third tax year).
You can also to make an unlimited number of small £250 gifts in each tax year so long as the recipient is a different person each time – so those great nieces and nephews don’t have to be left out.
Tip 4: Consider setting up a regular payment – if you can afford it, gifting a grandchild up to £250 a month will maximise your IHT allowance and help reduce your estate’s potential tax bill.
Make sure it’s all tax free!
So, as a grandparent there are lots of ways you can help – from ad hoc payments to recurring ones, or roundups and cashback on your own spending.
With all this in mind, what’s the best overall option for family saving?
A Junior ISA not only means all the money invested is kept safe until the child turns 18, but the gains are also tax free. A mix of a stocks and shares JISA and a cash JISA means the money invested will have the best opportunity to grow.
While only the child’s parent or legal guardian can open a Junior ISA, it doesn’t mean they’re the only ones who want to make contributions. However, unlike Beanstalk, not all providers make it easy for family and friends to pay money in.
Our experience is that grandparents in particular want to help out and the right JISA can simplify this.
Tip 5: If you’re a grandparent, you’ll need to ask the parent to open the JISA account – and with Beanstalk all they do then is invite you via the Beanstalk app and you can contribute in exactly the same variety of ways.
You can read our full introduction to Junior ISAs here: https://beanstalkapp.co.uk/jisa-guide.