Investing for grandchildren - a simple guide

This article was written by Paul Hancock and originally published by Canaccord Wealth.

As a grandparent, investing for your grandchildren's future is a meaningful way to provide them with financial security and opportunities - whether it's paying for their education, a future home, or even retirement.

With careful planning, you can make significant contributions that align with your own financial situation and goals. Paul Hancock, Senior Wealth Planner, Canaccord Wealth outlines a comprehensive guide on how to invest wisely for your grandchildren, helping you navigate the various options available.

Tax-efficient options for investing for grandchildren

It’s often more tax efficient for grandparents to save or invest on their grandchildren’s behalf than it is for parents to invest for their children, who may suffer potential tax consequences.

• Junior ISA (JISA) - A Junior ISA is one of the most popular ways of saving money for grandchildren. These accounts offer tax-free growth, meaning any interest or gains are not subject to capital gains tax (CGT). Contributions can be made up to a specific annual limit of £9,000 and the money is accessible by your grandchild when they turn 18. The benefit of a Junior ISA is that the money doesn’t form part of your estate, which means it won’t be subject to inheritance tax (IHT). This assumes that any gifts made to the Junior ISA fall under the IHT gifting allowances or otherwise you survive for seven years from the date of the gift.

• Junior Self Invested Personal Pension (Junior SIPP) - A junior SIPP is another a great way to invest for your grandchild’s long-term financial future. Unlike Junior ISAs, a Junior SIPP is designed specifically for retirement savings. The key benefit of a Junior SIPP is the tax relief on contributions. You can contribute up to £2,880 per tax year and the government adds 20% basic rate tax relief, boosting the total contribution to £3,600. However, the funds are locked in until your grandchild reaches at least 57 years old. While this may seem a long way off, the advantage of starting early is the significant compound growth over the years, which could potentially result in a substantial retirement fund. A Junior SIPP can be a fantastic way to ensure your grandchild has a comfortable retirement, even if they don’t have the means to contribute themselves.

• Lifetime ISAs (LISAs) - Once your grandchild turns 18, a Lifetime ISA (LISA) can be a valuable tool to help them save for their first home or retirement. The government offers a 25% bonus annually on contributions, which can be a significant boost. Each year, until they turn 50, your grandchild can contribute up to £4,000 and they’ll receive a bonus of up to £1,000, making it an attractive option for young adults just starting to save. All interest accumulated within a LISA is tax-free too. A LISA can act as a stepping stone toward helping your grandchild get on the property ladder or saving for their future retirement. While the funds can’t be accessed until age 60 (unless used for a first home purchase), it’s an investment that can grow significantly over time. 

Gifting money to grandchildren and inheritance tax

When thinking ‘what is the best way to leave money to my grandchildren’ it’s important to consider the potential IHT implications. The amount you ‘gift’ to your grandchildren could be subject to IHT, depending on how much you leave and when you leave it. However, there are several ways to reduce this potential liability, such as gifting money directly to grandchildren through ISAs or trusts.

By making gifts to grandchildren within your annual capital gift allowance – up to £3,000 a year - or setting up a trust, you can reduce the value of your estate, ensuring that more of your wealth passes to the next generation without being impacted by IHT. It’s also possible to use other exemptions such as regular gifts from surplus income. Any gifts made that fall outside of these allowances are subject to the ‘seven-year rule,’ meaning they will only fall outside of your estate once you have survived for seven years from the date of the gift.

Trusts for grandchildren

If you want more control over how and when your grandchild benefits from your gifts, setting up a trust fund for grandchildren can be an excellent option. Trusts can be tailored to your wishes, ensuring the money is used in a way that aligns with your values. For example, you may want the funds to be available for education, a home deposit, or even for a particular milestone in their life.

Trusts for grandchildren can be structured in different ways, such as discretionary trusts or bare trusts, depending on how much control you want to retain. One of the main advantages of using a trust is that it offers protection for the assets and can also help minimise IHT when set up correctly.

How we helped Jane and Peter to invest in their grandchildren’s future

Retired with secure pensions, Peter and Jane wanted to support their daughter and newborn grandson, Jack, without risking their own financial future.

We advised Peter on investing tax-efficiently to provide a significant amount of money for Jack when he turned 18. Our strategy was IHT-efficient and protected Peter and Jane’s financial stability.

They’re thrilled with the plan and regularly review their grandson’s investments with their Canaccord Wealth Planner.

“Without Paul’s advice, we would never have thought about setting up a pension for Jack. He’ll be very grateful one day – and before that, he can enjoy his Junior ISA once he becomes a young adult.”

Read the case study in more detail here.

What is the best way to leave money to my grandchildren?

The best way to leave money to your children or grandchildren depends on your family’s wealth, your goals and your wishes for how the money should be used. There is no one-size-fits-all approach, but with careful planning, you can create a strategy that helps you achieve both your own financial goals and those of your grandchildren.

At Adam & Company, an expert Wealth Planner can show you a range of ways to help secure your grandchildren’s future. They can help you understand the tax implications of each option and guide you on how to structure your wealth.

What should I do next for investing for my grandchildren?

Investing for your grandchildren isn't just about passing on wealth - it's about shaping their future. Whether it's helping them onto the property ladder, supporting their education, or giving their retirement savings a head start, smart financial planning can turn your generosity into a lasting legacy. With the right strategies, you can support the next generation while keeping your own financial security intact.

Consulting a Adam & Company Wealth Planner can help ensure that you’re making the right decisions for your grandchildren’s financial future and give you peace of mind that you’re on track to meet your own goals.

Investment involves risk. The value of investments and the income from them can go down as well as up and you may not get back the amount originally invested. Past performance is not a reliable indicator of future performance.

The tax treatment of all investments depends upon individual circumstances and the levels and basis of taxation may change in the future. Investors should discuss their financial arrangements with their own tax adviser before investing.