Saving for a child or grandchild: the options:
Parents have several options when saving for a child or grandchild. Choosing the right one can make a big difference.
Contributing to a pension
Although most people won’t set up a pension until they reach working age, a pension can be started as soon as someone is born. In addition, any contributions made by a parent or grandparent, which can be made directly to the plan as ‘third party contributions’, will be treated for tax relief purposes as if they were made by the beneficiary themself.
This means that contributions paid to a ‘relief at source’ scheme will receive tax relief of 20% (£20 for every £80 net contribution) as long as the gross contributions do not exceed the beneficiary’s relevant UK earnings for the tax year. In addition, where a beneficiary has paid income tax at a higher rate, they will be able to claim the difference directly from HMRC through self-assessment - i.e. a further 20% for a higher rate (40%) tax payer.
Although a child under the age of 18 is unlikely to have relevant UK earnings, total contributions up to the ‘basic amount’ of £2,880 net (£3,600 gross) can be made each year and will still benefit from tax relief.
Although pension contributions can be one of the more tax efficient ways to gift money to a child or grandchild, the drawback is that money is likely to be inaccessible until they reach 57 (normal minimum pension age is rising from 55 to 57 in April 2028). Some people may therefore want to find other ways to help family where there is more chance that they will be around to see their loved ones enjoy the money.
Lifetime ISAs (LISAs)
If the child/grandchild is between 18-40, helping them save into a lifetime ISA (LISA)* can be beneficial, especially if they are trying to raise a deposit for a first home. This is because the Government will add a 25% bonus to deposits of up to £4,000 a year (i.e. £20 for every £80 deposited). However, if withdrawals are made for any purpose other than purchasing a first home, a tax penalty of 25% (i.e. £25 on a withdrawal of £100) will apply unless the individual is terminally ill or aged 60 or above. Since the tax penalty exceeds the initial bonus, it is normally not the most tax-efficient investment if the penalty is likely to be incurred.
* Note that only the child/grandchild, as the account holder, can open and manage their LISA but it’s possible to gift money to an account holder to pay into their LISA.
For those who want more control over how money is spent, setting up a trust can help ensure any investment is used appropriately. There are a wide variety of trusts that can be used to meet individual requirements.
Notes to editor
* LV= surveyed 4,000 nationally representative UK adults via an online omnibus conducted by Opinium in June 2022.
**The information given here is based on our understanding of current legislation and HM Revenue & Customs (HMRC) practice, which can change.