Blog: How to leave a grand gift for your grandchildren

It’s not just wisdom that many of us want to pass on to future generations. If we’re in a position to, many of us would like to leave something behind to help those in our family who will be around long after we’re gone get ahead in life. However in February this year, our research found that nearly a third (32%) of respondents didn’t know how to share their wealth each year without incurring punitive costs.

One option is to open a stocks and shares JISA for your grandchildren. They can take this over at age 16 and withdraw their funds from 18. It offers the ability to invest in a wide range of shares and investment funds. As a rule, it’s generally accepted that for savings which will have more than five years to mature, investments should be better for long-term growth. If you’re happy to take some risk with your capital with the potential for more growth for your grandchild , this could be for you. In all JISAs there is no tax to pay on any return.

However, if you’re looking purely to protect your capital or for a lower risk , it may be wise to look at Cash JISAs that will pay interest similar to a savings account. It’s worth pointing out that when inflation is higher than your interest rate then it will reduce your capital in real terms. A cash JISA can be open at the same time as a stocks and shares JISA, too, so these two are not mutually exclusive.

On the other hand, if you want an even longer-term nest egg for your grandchild, a child pension (junior SIPP) could be the right selection. Worryingly, there’s an increasing amount of debate over the the prospects of millennials ever being able to retire, and investing in a long-term savings account could prove to be the right move. Given that it’s inaccessible until the beneficiary is 55 (or 57 from 2028), the junior SIPP has the potential to allay these concerns.

When looking at these options you must decide what you want this cash gift to achieve. If you want it to go toward paying for ever-expensive university expenses then a cash JISA may be the way to go. But, if you’re more concerned about the end of your grandchild’s working life resulting in a lower standard of living and an uncertain state pension, then the Junior SIPP may make more sense.

It’s also worth remembering that you can gift your grandchild up to £3,000 tax-free in any financial year before incurring inheritance tax. The amount to be paid on gifts of more than £3,000 is dependant on whether it was given within seven years before the person dying, and an individual can carry over any leftover allowance from one tax year to the next, up to a maximum of £6,000.

Contributing £2,880 a year, just under the threshold for IHT, into each of the three options, produces quite different results. In the cash JISA, assuming growth of 1.50% per annum, the savings pot would be £59,894 after 18 years. In the stocks & shares JISA and junior SIPP, including the £720 annual tax relief for the latter, an average 5.0% (net of charges) growth per year could see that sum rise to £85,072 and £106,340 respectively. However, it’s important to remember that there are no guarantees with investments and they can fall as well as rise.

How to pass wealth on to family members is a big decision to make. You want to do the best for your grandchild and provide them with even a small gift as they make their way in the world, while maintaining your own lifestyle. But be it long or short term, a little amount or a huge amount, always think about what you want the gift to achieve for your grandchild and choose your investment based on that.