"Attila - I was trying to avoid going no contact as it didn't feel fair to stop my DC having a relationship with their only grandparent. DS is young enough that he won't ever know the difference but how do I explain to DD (4) that she won't ever see Nana again?"
Narcissists tend to either over value or under value the relationship with their grandchildren. Look at how badly affected you have been and still are by your mother's mere presence in your lives.
Your mother is a narcissist who is simply repeating the same old dysfunctional relationship. The only difference now your children (and in turn you) who are in her firing line. Children benefit from having functionally healthy grandparents, your mother is clearly not an emotionally healthy individual to be at all around. Your mother is trying to buy your DDs affections with money; it is all loaded with obligation.
Your bringing new life into the world did not fundamentally change your abusive parent into a loving family member. But adult children of narcissists (ACONs), in this case you, seem to show a natural affinity for believing in this work of fiction. We have always wanted our parent to be loving to us, and now we want our parent to be a loving grandparent. What we want and what we end up with are two very different things. Where we usually get tripped up is our failure to recognize the adaptability of the narcissist to changing circumstances.
You are the parent here and as such your children are relying on your good judgment. You can assure your child that you are making a wise and loving decision for them as well as yourself. I am not going to script what you should say because you are the only one who knows your children, but you must convey that this isn't up for negotiation. This is not a decision that the child gets to make. Yes, children usually love their grandparents. Children are often quite indiscriminate in their love which is why they need parents to guide them. Not every person is safe to have around and this is a good time to teach that important life lesson. The more matter-of-fact you are, the more matter-of-fact your children will be. When we act hysterical, they will usually reflect our hysteria. If you act anxious, they will act anxious. If you appear unsure, they will push. Model the reaction and attitude you want your children to adopt.
If you have another set of grandparents in the picture then focus on them. It is rare that both sets of grandparents are nasty. Emphasize to your children how much we enjoy being around grandma and grandpa so-and-so (the decent and loving grandparents). Cultivate your children's relationship with the decent, loving grandparents. Teach your children to be grateful for the decent, loving grandparents. Gratitude is a highly effective antidote to loss. Focus them on what they have, not what they don't have. Model that attitude of gratitude.
You're older and therefore more experienced which is the point of being the parent. The child is dependent on your good sense and protective wisdom. You're smarter than your child; use that to your advantage (such as using the distraction method). You are the final authority. This is not a negotiable issue. Your child doesn't get to decide on this one because they lack the understanding, wisdom, experience and good sense that, hopefully, you have. So don't look like you're unsure or open to quibble. You'll undermine yourself if you look anything but firm and resolved on it. Use your advantages as parent to smooth the effects of the cut-off. Over time this will all quiet down. Kids tend to accept what is. It will happen more quickly if you follow the above advice.
Most of all, do not operate from a fearful mindset. Don't be afraid of your children's possible, or actual, reactions. Don't be afraid that you are depriving them of something important by cutting off a set of grandparents. You are only "depriving" them of bad things. Reassure yourself with that truth. Family is not everything. Blood is not binding. You are escaping the Mob Family. What should connect us is how we treat each other with love and respect. This is always a good lesson to teach our little ones. If any part of you is unsure of your decision then, for Pete's sake, don't show it. Your resoluteness will go a long way toward reassuring your children that you are acting in everyone's best interest. If your children know that you love them, they are going to feel reassured that this decision is also based in your love for them. They will find an added sense of security to know that you, as their parent, are willing to protect them even at the cost of your relationship with your own parent(s). Rather than being fearful, see the plentiful opportunities in this. You are protecting your children from someone whom you've experienced as being abusive; you are reassuring your children that you are in charge and are watchful for their best interests (creates deep sense of security); you can teach healthy family values which include that family doesn't get a pass for abusive behavior; you can strengthen and reinforce the healthy relationships in your extended family. Kids are less likely to feel like there is a void in their life if you fill it with good things.
Cutting off from your narcissist parent is a good thing. No need to act otherwise. Your children will sense it is a good thing by how you behave. Model how you want them to respond and it is likely they will imitate. Don't be afraid of their questions. Kids are amazingly resilient and well-equipped to handle truth. Parents are supposed to protect their progeny. If your child doesn't agree with how you go about that don't worry. They will often disagree with your decisions for their best interests. Nothing new there. It is your job as parent to make the tough decisions. If you know it is the right decision then proceed with confidence. Showing confidence is a quality of leadership. As a parent you are supposed to be a leader. Lead...and they will likely follow.