Following the recent boom in property and stock market prices, we are witnessing a shift from the ‘Bank of Mum and Dad’ to the ‘Bank of Nanny and Grandad’.
As a grandparent or parent who wishes to plan ahead, you may also be considering helping your grandchildren with their higher education costs.
What are University fees, how are they repaid and what is the interest rate applied to student debt?
A standard Undergraduate course in England starting in 2021 will cost £9,250 per annum, with students typically applying for a Maintenance Grant of £9,488 to assist with their living costs, subject to their location of study for example, in or outside London, and living at home or away). Therefore, for a three-year course this will cost the individual circa £56,214 plus any interest accrued whilst studying.
Interest applied whilst studying is RPI plus 3%. Once the individual has finished their studies and earning commences, the interest rate applied will be subject to their annual earnings with the lowest interest rate of RPI applied for those earning below £27,295, and highest rate, RPI plus 3%, applied to those earning above £49,130.
Individuals with student debt only make repayments once they have finished their studies and have annual earnings above a certain threshold. At present, a contribution of 9% on earnings above £27,295 is made to the repayment of student debt.
For expert advice on any financial matter why not book a call with a Financial Adviser from Integrity365. Email Integrity365 directly for more information.
What do I need to consider when providing grandchildren with financial assistance?
Our top five points to consider when providing grandchildren with financial assistance are as follows.
1. Can you afford it?
Gifting capital to grandchildren to provide them with a head start in life is a very generous act. However, this should only be considered should it not impact on your own personal standard of living. It is extremely difficult to understand the amount of capital needed in retirement due to the simple fact that we have no idea how long we will live, how our expenses will change, and how our investments will perform.
To provide confidence in your financial planning, speak to a financial adviser who can utilise Cashflow Modelling to help you understand what spare capacity you have in your finances.
2. Will there be additional grandchildren down the line?
All parents and grandparents want to fair to their children/grandchild and offer them the same opportunities in life. Should you have a limited capacity to provide financial assistance, how many grandchildren does this need to be split between? Do you have additional capacity to help other grandchildren that are yet to be born?
3. Timing of a Gift of Wealth?
Should you make a gift of wealth for University Fees when a grandchild is born, the capital will have the ability to grow for approximately 18 years before the individual will needs access to the funds. As well as this growth, there is the added bonus of investment compounding. For example, an initial gift of £10,000 growing at 5% per annum would equate to £24,066 in 18 years’ time.
The earlier you can invest any capital, the longer the capital can grow in a suitable investment vehicle.
4. Control of the capital
Whilst we would all like to think the younger generation would invest any gift of wealth from their grandparents into their long-term future, we know some do not always make informed decisions. Is it wise to make any long-term investment in the grandchild’s name? If so, they would typically have full control, and authority, of how and where that money is spent at age 18, possibly 16.
To ensure the money is spent on University Fees - or should they choose another path, perhaps a house deposit - it is important to consider when it is appropriate for the child to have access to the funds.
5. What are the Inheritance Tax implications?
We have the ability to gift away £3,000 per year to any individual or individuals we like without any Inheritance Tax implications - in addition, you may carry forward one year’s unused allowance. Any additional funds gifted out of your estate would more than likely be considered a Potentially Exempt Transfer whereby the seven-year rule comes into play, subject to your circumstances. For those that may not be familiar with the seven-year rule, quite simply, if there’s Inheritance Tax to pay, it’s charged at 40% on gifts given in the three years before you die. Gifts made three to seven years before your death are taxed on a sliding scale known as ‘taper relief’ however, gifts are not counted towards the value of your estate after seven years.
Inheritance Tax planning is an enormously complex subject, and we would recommend discussing your circumstances, intentions, and objectives with a professional if you do wish to make a gift above £3,000 out of your estate.
Giving your grandchildren a head start in life by offering financial assistance, especially if done early, can make a huge difference to their future. If you wish to do so, or have been considering this, Integrity365 can assist you with financial planning advice to ensure the maximum benefit is achieved for both you and your grandchildren.
Written by Douglas Sims DipPFS, Independent Financial Adviser, Integrity365.
Customer service is at the heart of everything Integrity365 do, from the early days of pensions and ISAs to investments and lump sum decisions, through to retirement and later life planning, they are here to support you through the key stages of your life with a holistic approach to financial planning.