A subject that often comes up in client meetings is financial planning for children.
Understandably, any parent will want their child, or children, to be as secure as possible in the future, and to give them the best possible life chances.
As with most financial issues, the key advice I tend to give is that the earlier you start planning for your children, the better.
There are various ways of saving for them, and additional ways you can plan your own finances to ensure their future. Here are seven steps to help plan your children’s financial future.
Clearly this is a high-level overview. There’s no such thing as a “one size fits all” approach to financial planning for children, but hopefully this should give you a good idea of some key steps you can take.
1. Simple savings
When it comes to financial planning for your children, a general savings account in a child’s name is a good, simple starting point.
You’ll have control of this and can both kickstart it yourself with a lump sum, add gifts and then encourage them to save money themselves.
It’s money that they can see as being “theirs” – that they can save up and use themselves. It can also help instil a valuable savings habit and teach them the very basics of financial management.
Although interest rates on savings are at historically low levels that struggle to keep up with inflation, children’s accounts are typically more competitive. Accounts offering interest rates of up to 3.5% are currently available.
2. Junior ISAs – tax-free savings and investment
You can pay up to £9,000 in the 2021/22 tax year into a Junior ISA (JISA) for each of your children. You manage this on their behalf until they reach 18, when ownership will automatically pass to them.
The generous maximum allowance means that it’s possible to build up a quite substantial sum for each child. For example, if you were to contribute the maximum £9,000 each year from birth to age 18, an annual growth rate of 4% would mean a fund of over £230,000 at age 18.
You can choose to invest in cash or stocks and shares – or a mix of both.
Cash JISAs usually offer higher interest rates than standard ISAs. So, searching for a competitive rate is important.
A Stocks and Shares JISA could experience investment volatility. However, given the potential timeframe of up to 18 years, and the old investment adage about “time in the market”, stock market investment could provide a greater chance of growth on the money saved.
One word of caution here. You can’t write any kind of ISA in trust, so you might also want to think about how you control such a potentially large sum of money being accessible to your child at the relatively young age of 18.
3. Long-term investment into a pension
It might sound rather odd, but one of the most tax-efficient ways to save for your children’s long-term future is into a pension.
The tax incentives on pension savings make these very attractive. You can pay in up to a maximum of £2,880 annually for each child, to which the government adds basic-rate tax relief to make a total of £3,600.
Clearly, the potential downside is that the money is tied up for a very long period. The current minimum pension age is 55 – rising to 57 in 2028 – so this must be seen as a very long-term investment.
Over that extended period, however, money invested in stocks and shares could benefit from substantial growth, so having a decent-sized pension pot in place when they start making their own pension plans could prove invaluable.
4. The importance of estate planning
As an immediate priority, both you and your spouse or civil partner should make sure you have wills in place. You’ll also need to update them as your circumstances change.
As you get older, you’ll start to think in more detail about estate planning. It’s a long-term planning process, but it’s never too soon to start having discussions about it with your financial planner.
With advice and forethought there are some simple steps you can take to help minimise any future Inheritance Tax bill for your children. We’ll come onto that next.
5. Making gifts
As well as setting up and contributing to JISAs and pensions in their name, you can also pass money to your children as gifts.
You can make up to £3,000 worth of gifts in the 2021/22 tax year without it counting towards the value of your estate for Inheritance Tax purposes.
Beyond those limits, providing that you survive a gift by seven years, you can gift any amount and it won’t be included in the value of your estate. So, if you do want to pass large sums of money to your children, it can be sensible to do this sooner rather than later.
In the case of gifting substantial financial assets to your children, you could consider using trusts, to help you stipulate how the money is to be distributed by your trustees.
6. Financial support from other family members
As I mentioned in the introduction, I’m often asked by grandparents for advice on the best way they can financially support their grandchildren.
How they support them will clearly be dependent on their means, and if they do offer to contribute financially, you’ll want to bear their circumstances in mind.
They may simply want to make ad hoc gifts or provide more structured support. Many of the options I’ve outlined here are equally valid for grandparents as they are for parents, although grandparents can’t open a JISA on behalf of a child – only legal parents and guardians can do this.
7. Your children’s education
Although not specifically part of their financial planning, funding your children’s education is a key planning issue that you may well be considering.
The average annual cost of private education is now more than £19,000. University tuition fees are a maximum of £9,250 per year for UK students.
One advantage is that, in each case, the timeframe is fixed. You know when a child will be starting secondary education and, likewise, with going to university. This makes putting an investment plan into place for both easier.
Final word – the importance of key financial lessons
As well as helping secure their financial future, I occasionally get asked by parents to suggest key financial lessons they can teach their children that will stand them in good stead as they make their own way in life.
Here are five that I think children should understand by the time they are 18:
- How to manage their finances effectively
- Knowing the importance of saving money
- Understanding the impact of compounding, both negative and positive
- Being aware of the potentially crippling effect of credit card debt
- The fact that if a financial offer sounds too good to be true, it probably is.
Get in touch
To find out more about financial planning for your children, or grandchildren, please give me a call on 07769 156 250.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
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The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.