Providing financial support to your grandchildren can be a meaningful way to invest in their future. From practical steps to financial strategies and legal considerations, there are several ways you can help set them up for long-term security and success.

Financial actions

1. Financial gifts and savings accounts

One off or regular gifts: Consider gifting money when you might otherwise give a physical gift. For special events like a birthday, graduation or a religious or cultural event, deposit a financial gift into a savings account specifically set up for your grandchild. According to the MLC Financial Freedom Report, 18% of grandparents provide one off financial gifts to celebrate milestones or alleviate significant expenses and 16% offer regular financial gifts to support their grandchildren.

Savings accounts: Open a high interest savings account in your grandchild’s name. Compound interest helps regular contributions, no matter how small, grow significantly over time.

2. Education funds

Education bonds: These are tax effective investment vehicles designed to save for future education costs. Contributions to these bonds can grow. Income is taxed at 30% within the bond. Withdrawals for education expenses will attract a tax rebate for tax paid within the bond. There may be tax implications for the grandchild.

Paying for school or university: Directly paying for your grandchild’s tuition can be a substantial help. This can reduce the need for student loans and the financial burden on their parents.

3. Investment accounts

Custodial accounts: These accounts allow you to invest in stocks, bonds and mutual funds on behalf of your grandchild. The assets in the account legally belong to the child but are managed by you until they reach adulthood.

Superannuation contributions: If your grandchild earns an income, consider making contributions to their superannuation fund. This can provide a significant boost to their retirement savings. Concessional contributions count towards a cap and penalties may apply if the cap is exceeded.

Practical steps

1. Financial education

Teach financial literacy: Share your knowledge about budgeting, saving and investing. Encourage good financial habits from a young age. The MLC Financial Freedom Report highlights how financial support from grandparents can lead to greater financial satisfaction and stability later in life. The report shows that 43% of Australians surveyed who received substantial financial support from their grandparents are extremely or very satisfied with their current financial situation, compared to 17% who did not receive such support.

Involve them in financial decisions: When appropriate, involve your grandkids in discussions about money. This can help demystify finances and prepare them for managing their own money.

2. Support for extracurricular activities

Funding hobbies and interests: Financially supporting your grandchild’s hobbies, sports or other extracurricular activities can help them develop skills and interests that may benefit them in the future.

3. Housing and transport assistance

Living arrangements: Allowing your grandchild to live with you rent free or at a reduced rate can help them save money for other important expenses, such as education or starting a business.

Helping them buy a car: Nearly one in ten grandparents (9%) help their grandchildren achieve a degree of independence by assisting them with their first car purchase.

Other important considerations

1. Estate Planning

Wills and trusts: Ensure your Will is up to date and consider setting up a testamentary trust for your grandchildren. These trusts can provide financial support for specific purposes, such as education or buying a home and can be managed according to your wishes.

Power of Attorney and guardianship: Designate a trusted individual to manage your affairs if you become unable to do so. This ensures that your financial support for your grandchildren continues seamlessly.

2. Tax implications

Understand gifting rules: If you receive government support or a pension, there may be caps on the amount you can gift without affecting your pension. Make sure you check prior to gifting significant sums.

Consult a financial adviser: Work with a financial adviser to understand any social security and tax implications of your financial gifts.

Avoiding risks to your retirement savings

While supporting your grandchildren is a noble goal, it’s crucial to ensure you don’t compromise your own financial security. Here are some strategies to avoid risks to your retirement savings:

1. Diversify your investments

Diversification can help protect your retirement savings from market volatility. By spreading your investments across different asset classes, such as stocks, bonds and real estate, you can reduce the impact of any single investment’s poor performance.

2. Maintain an emergency fund

Having an emergency fund can provide a financial cushion in case of unexpected expenses.

3. Adopt a sustainable withdrawal rate

The 4% rule is a common guideline, suggesting that you withdraw 4% of your retirement savings in the first year and adjust for inflation in subsequent years. This can help your savings last longer during your retirement.

4. Consider annuities or IRIS products:

Speak to your financial adviser about whether annuities or an innovative retirement income stream (IRIS) product may work for you to reduce the risk of outliving your savings.

5. Regularly review your financial plan:

Periodically reviewing your financial plan with a financial adviser can help you stay on track and make necessary adjustments.

6. Limit large financial gifts:

While it’s generous to support your grandchildren, it’s important to balance this with your own financial needs. Consider setting limits on large financial gifts to ensure your retirement savings remain intact.

Inspiring the next generation

Your financial support can do more than just provide immediate benefits; it can inspire your grandchildren to achieve their own financial independence. By setting a positive example and providing the tools and resources they need, you can help your grandchildren build a solid foundation for their future.

Setting your grandkids up for the future involves a combination of financial gifts, practical support and intentional planning. By taking these steps, you can help your grandchildren have the financial stability and knowledge they need to achieve their dreams. Your legacy will not only be remembered in the form of financial support but also in the values and lessons you impart.

References

• MLC Financial Freedom Report 2024
• Australian Taxation Office (ATO) guidelines on gift tax

Source: MLC