How can I help fund my grandchild's educations?

In strained financial times, the burden on parents to pay for a child’s time at school or university can seem daunting. Luckily, there are a lot of ways caring grandparents can ease the pain, says Moira O’Neill

With private school fees averaging £16,000 a year1 and students leaving university with debts of more than £50,000, educating a child can be a strain on even the most affluent family’s finances. Recent research2 revealed that 19% of parents rely or plan to rely on grandparents to help pay towards private school fees for their children. Grandparents’ largesse needn’t stop with school fees, however; 13% of parents whose children have gone to university or hope to do so have asked for financial help towards fees and living costs from their child’s grandparents.

Many grandparents appreciate the struggle and want to ease the financial burden long before they’re asked. Here are three scenarios and some suggestions on how you can help.

“I'd like to pay my grandchild's school fees”

It goes without saying that before you use any of your funds to help the younger generation, you need to be quite sure that you’ll still have enough to sustain yourself through retirement and pay for any long-term care you may need…

Beyond the instinct to support your family, it’s probably useful to know that helping with school fees may reduce any potential inheritance tax liabilities. Inheritance tax is charged at 40% on gifts given in the three years before your death. Gifts made three to seven years before your death are taxed on a sliding scale known as ‘taper relief’. But after seven years, any gifts that you’ve made won’t be counted towards the value of your estate. There are a few added extras to this seven-year rule. First, you can give away £3,000 worth of gifts each tax year (6 April to 5 April) without them being added to the value of your estate. This is known as your ‘annual exemption’.

You can also use the “regular gifts out of income” exemption, where, as long as there is a commitment to pay fees on a regular basis, gifts are free of inheritance tax – even if you don’t live for seven years after making the fee payments. You should document such gifts, perhaps by writing a letter explaining your intentions. If your grandchild hasn’t started school so doesn’t need the money immediately, you’ll need to put it into a savings or investment plan.

Another option for giving cash to a child is to contribute to a Junior Individual Savings Account (Junior ISA). These are accounts for children under 18 that allow up to £4,080 a year (the allowance for the current, 2016-17, tax year) to be set aside for a child in a tax-efficient way. Junior ISAs let you invest in cash or stocks and shares, and they are available from a wide range of providers including banks, building societies, fund managers and stockbrokers.

Although a parent or guardian must open a Junior ISA, once it’s open anyone can pay in. As well as giving cash contributions, grandparents could offer to help choose the investments.

“I want my grandchild to leave university debt free”

Many grandparents will feel uneasy at the thought of their grandchildren being burdened with a large, long-term debt, and may be tempted to help them pay for their university education up front. With forward planning, this is achievable. While parents who save or invest money on their children’s behalf can face a tax bill if their child’s savings or investments earn more than £100 in any tax year, the same does not apply to you as a grandparent. If there are more than five years until your grandchildren are likely to need the money, it’s possible for you to invest it for growth, rather than holding it in a cash savings account where it may struggle to keep pace with inflation. Investments in professionally managed funds are particularly worthwhile for children. Simply invest the money in your own name, then add the child’s name or initials to the account to enable you to ‘designate’ or identify which assets are theirs. You can then just transfer the assets to your grandchild when they reach the age of 18. Any investment growth will be subject to capital gains tax, but this can often be offset by the child’s tax allowances.

Helping with school fees may reduce any potential inheritance tax liabilities

You might also consider contributing £170 a month into your grandchild’s Junior ISA from the moment they’re born. With investment growth, this could potentially give them a very decent sum of more than £53,0003 by the time they turn 18 – a significant contribution towards a debt-free university education.

“I'd like to help with my grandchild's university costs”

Going to university has become a very expensive business. Currently the university tuition fee cap stands at £9,000 a year, but this is set to rise in line with inflation to £9,250 from September 2017. Living costs need to be added to this for students living away from home. To make matters worse, grants for students from low-income homes – families with annual incomes of £25,000 or less – have been replaced by loans. These changes mean some students are likely to end up saddled with starting debts of over £50,000.

Before you help out with student loan repayments, make sure you won’t be throwing money away. Student loans are quite different to other types of borrowing – it’s more helpful to think of a student loan as a ‘graduate tax’. Graduates only begin to pay off their loan once they start to earn £21,000 or more annually, at which point they’ll pay interest and/or repay capital at 9% of their income above this threshold. Any outstanding loan will, under current legislation, be written off after 30 years.

With student debt exceeding £50,000 even before interest starts to roll up, it’s likely that a significant proportion of students won’t repay their loan in full. If your grandchild ends up working in a lower-paid job, or taking time off to raise a family, he or she may never need to pay off even as much as the full up-front cost of the university degree. For students unlikely to be among the highest potential earners, it’s probably better to contribute towards the cost of accommodation, or pay down a youngster’s credit card or overdraft instead.

Laws and tax rules may change in the future. The information is based on our understanding in January 2017. Your personal circumstances also have an impact on tax treatment.

  2. Investec Consumer Intelligence Survey, December 2015
  3. Fidelity International based on 5% growth per annum, 0.75% annual management charge and platform service fees

Life in a Day

Laurence Gagen

Laurence Gagen

Senior Client Portfolio Manager Standard Life Wealth

The day starts by catching up on news and developments in the markets and the global economy, my focus being on the sectors and companies affecting my clients’ portfolios. I’ll also scan my emails to see if any urgent messages have come in overnight – technology means that clients can contact us at any time of the day or night, so I need to see if anything needs to be actioned straight away. We have a daily investment meeting at 8.30am, which is an opportunity for the investment desk to brief us on any changes to recommendations. We also have fortnightly team meetings to discuss issues in the three key areas of private clients, charities and trusts.

On a typical day my time might be spent reviewing clients’ portfolios, responding to queries and preparing presentations. I might also meet an existing client to discuss portfolio performance and outlook and perhaps to review their strategy in the light of changing circumstances – if they’re one or two years away from retirement, say. Most of our clients come to the office, but occasionally I visit them at home. I recently went to see a client and their adult children; we discussed how they could set up portfolios in their children’s names, using their ISA allowance. Increasingly, there’s an acknowledgment that wealth is caught up in the older generation, who are now looking for ways to pass it on to their children or their grandchildren. We can help in many different ways – for example, if a client releases capital through downsizing we can ensure that it’s invested in the most efficient way.

Wealth is caught up in the older generation, who are now looking for ways to pass it on to their children, or their grandchildren

From time to time I also attend industry seminars – we don’t have the monopoly on good ideas and it’s helpful to understand other fund managers’ outlooks on life.

Illustration: Lee Martin

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