Supporting yourself and your family

Grandparents are playing a bigger role in supporting families financially, but it is important to take your future needs into account

Grandparents are one of the most important support systems for UK families, increasingly stepping in to provide childcare to grandchildren so parents can return to work. There are also signs that those who are able to are providing financial support to grandchildren struggling with student debt or trying to get onto the property ladder.

If you are in a position where you are able to provide financial support, it is important to be aware of your options, the pitfalls of gifting money, and the support that is available to you if you are providing childcare.

Research carried out by YouGov on behalf of Royal London shows there is a strong ‘bequest motive’ among the over-65s to help their families. These transfers of wealth don’t just happen when someone passes away. According to the research, roughly two-thirds of 65–74 year olds have given a lump sum to children, while one third of over-75s have given money directly to grandchildren.

The reasons for handing over such big sums included contributing towards a property purchase, events such as weddings, and school or university fees. So, where does this money come from?

Housing equity

Much of the baby boomer generation’s wealth comes from the money tied up in their homes. This money can be released once the home is sold after the owner passes away. Money can also be released should grandparents decide to downsize, or else, through equity release.

Downsizing has proved to be a popular option, with our research showing that 19% of the 65–74 age group had already downsized their property, with a further 13% saying they intended to do so. However, you should always consider the costs of selling the property and buying a new one.

Equity release enables homeowners to release money from their home while they remain in it. While growing in popularity, it remains niche as the interest rates can be higher than regular mortgage products. It is wise to seek impartial financial advice before taking out equity release.

Pensions

Pension pots can be accessed from the age of 55 and this money can be used to help family members. If gifting money from a pension, care must be taken that the grandparent’s future income needs are taken into account to prevent any financial hardship.

Pensions can be left to children or grandchildren within an income drawdown arrangement. Death benefits in pensions used to attract a 55% tax. Now, if you die before the age of 75, then your beneficiary won’t have to pay any tax on withdrawals. If you were to die after the age of 75, then withdrawals would be taxed at the beneficiary’s marginal income tax rate.

The flexibility of income drawdown means beneficiaries can take money as needed, which can prove handy when it comes to paying school fees, for instance.

Lifetime ISAs (LISAs)

LISAs are open to anyone aged between 18 and 40 looking to save either towards a home or retirement. The maximum that can be contributed is £4,000 per year and, in return, the government tops it up with a 25% bonus. LISAs aren’t designed for the older generation, but grandparents can give their grandchildren money for them to put into a LISA. However, it is important to remember that only £3,000 of their income can be paid into a LISA each year without incurring a potential inheritance tax charge.

Inheritance tax considerations

There is no tax to be paid immediately if money is handed over as a gift. However, there is a potential inheritance tax liability if the giver dies within seven years of making the gift, and their estate is worth more than the current inheritance tax threshold of £325,000.

There are several gifting allowances that can be used. You can currently give away up to £3,000 of your income each year without it potentially counting towards the value of your estate. Gifts of £5,000 can be made to help with a child’s wedding, while small sums of less than £250 can also be gifted. It is a good idea to keep clear records of any gifts.

Childcare

Grandparents are also increasingly helping out with childcare so parents can return to work. Specified adult childcare credits were introduced in 2012 to protect the state pensions of working-age grandparents caring for grandchildren.

A parent claiming child benefit for a child under the age of 12 will get National Insurance (NI) credits towards their state pension. However, if they return to work, they don’t need those credits, so that credit can be transferred to the grandparent looking after the child instead.

You currently need 35 years of contributions to qualify for a full state pension, so if you are in need of extra qualifying credits you can get in touch with HMRC.

It looks likely that those grandparents in a position to do so will continue to help out their grandchildren as needed. However, if you are in this position, it is important to ensure you take into account your own future needs and potential tax position before handing over your money. If you are unsure about anything, it is a good idea to seek impartial financial advice.