What could be the best way to provide for your grandchildren?


By Chancellor

With both property prices and the cost of living continuing to rise, as well as low interest rates making it difficult to save, the ‘Bank of Mum and Dad’ is increasingly becoming a partnership with the ‘Bank of Gran and Grandad’. If you have grandchildren, it’s only natural that you’ll want to provide for them in some way as you move towards your retirement years. But what’s the best way of supporting the younger members of your family in the long term as well as the short term?

One way that you could do this is to set up and regularly contribute to a pension in your grandchild’s name. As today’s younger generation are likely to miss out on the robust pension security enjoyed by their parents and grandparents before them, creating a pension for them early in their life will undoubtedly help them in the decades to come.

A key plus point of paying into a pension is the tax relief your investment will enjoy. Including the 20% boost this relief will provide, you can pay in up to £3,600 annually to your grandchild’s pension even if they’re not yet earning an income. Adding £240 a month will achieve this sum, with £2,880 paid in by you and a further £720 in tax relief claimed by the pension provider automatically.

Doing this for fifteen years will mean that a 21-year-old grandchild today could have a pension pot of £220,000 by the time they reach 57, and that’s without including any additional contributions. Assuming an annual net growth of 5% after charges, if the pension remains untouched until they reach 67 it could grow further, to around £340,000.

However, this highlights the one potential drawback of choosing to pay into a pension: the money won’t be available to your grandchild until they reach their 50s. Whilst this does mean it can be left to mature, it also means that any money paid in won’t be available should it be needed. As there are likely to be other forms of expenditure you might want to help grandchildren with, such as paying for a deposit on their first home or going to university, you should think carefully about how much you want to put away for their future and how much you want to make available to them in the short term.

Sources

http://www.telegraph.co.uk/money/special-reports/can-set-pensions-grandchildren/