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Grandparents should reconsider leaving a one-off inheritance

Paloma Kubiak
Written By:
Paloma Kubiak

Older, wealthier family members should make regular gifts to their grandchildren rather than leaving them a one-off inheritance, a report suggests.

The study by wealth manager Brewin Dolphin said the baby boomer generation should re-think how they pass on their wealth to younger generations.

“Only a small percentage of people have thought beyond one-off gifting with their inheritance planning. A huge difference could be made by making regular contributions to a grandchild now via a junior ISA or pension,” said Liz Alley, divisional director of financial planning at Brewin Dolphin.

“The potential long term investment growth, the effect of compounding and the inheritance tax savings from this approach means that one silver pound gifted and invested today, could be worth three times as much to grandchildren later on.”

The problem

The study of 11,000 people, produced in conjunction with think tank Centre for Economics and Business Research (Cebr), revealed the gulf between expectation and reality among those aged 18-44 was contributing to the savings and pensions crisis in the UK.

On average, 18-44-year-olds think an income of £30,000 per year in today’s prices would be enough to give them a comfortable lifestyle in retirement. But they would need a pension pot of £725,000 to buy an annuity to achieve this level of income. In reality, this age group is only likely to accrue £175,000, a staggering shortfall of £550,000.

Savings hole

Away from pensions, the research found UK households now save only 6p for every pound compared to 15p in 1992. A worrying quarter of those surveyed said they save nothing at all while 18% save less than 5% of their net income.

In comparison, baby boomers have the most wealth as the over-65s are sitting on an estimated housing wealth of £1.3trn and their incomes are rising faster than those of the working population, largely due to final salary pensions and the ‘triple lock’ guarantee of state pensions.

Despite their wealth, the older generation who want to help their families, plan to do so by leaving all or part of their money via their will, potentially exposing loved ones to high inheritance tax bills.

Brewin Dolphin is calling on the government to consider the following new tax incentives:

  • Introduce a saving for gggrandchildren tax incentive scheme that would see a gift of 10% from a grandparent’s estate reduce their IHT rate from 40% to 36%, similar to the current charitable giving scheme.
  • Make all gifts to a grandchild’s JISA and pension immediately free from IHT (instead of the current seven-year rule).
  • Offer tax relief on a grandparent’s contribution to a grandchild’s personal pension.
  • Increase the personal allowance by the amount gifted to a grandchild’s pension.
  • Offer tax relief on a grandparent’s contribution to university tuition fees.

Grandparents cannot currently open a JISA or pension for grandchildren, but see YourMoney.com’s Three reasons to set up a pension for your child and our Junior ISA guide for more information on how to contribute to the schemes.