It’s not easy to discuss financial matters with loved ones but we are here to help guide you through.
In this guide we look at
Everyone wants to make sure that their children have the best start in life. This can often be a delicate balance between offering help when they need it and teaching them to be self-sufficient.
Of course, when children are young, this can add pressure to family finances. Planning for university education, a deposit on a flat or your child’s first car can seem a million years away. There will always be other priorities.
But it’s always worth starting to plan early, creating a vision of the life you would like to have and how this will benefit your children.
1. Planning for a child's education
According to the Independent Schools Council, the average private school fees in the UK are £14,940 per year . This has increased by 4.4% since 2019, and generally rises at a higher rate than inflation.
University will cost up to £9,250 per year, per child, depending on your location in the UK, with potentially the same again in living costs. Studying abroad can increase this significantly.
Multiply these costs by two or more children, and it’s apparent why education planning is a key goal for many parents. There are a few ways of making this a little easier:
- Start saving early. Consider stocks and shares-based accounts if the money won’t be required for at least five years.
- Investigate any bursaries, loans or scholarships that may be available.
- Suggest that grandparents and other family members contribute to the education fund if they would like to help.
2. Opening a savings account for a child
You can pay into a regular savings account on behalf of your child. These can offer higher rates of interest compared with adult accounts, although contributions are usually limited. Allowing the interest to compound over several years can add significant value to your child’s savings.
Savings are not tax-free, but given the amounts involved and the earning power of a typical child, it’s unlikely that interest will breach your child’s tax-free allowances.
However, remember that if your child earns more than £100 in interest on money you have gifted, this will be deemed to be your income. If you have already used up your personal tax-free allowance and savings allowances, you could pay extra tax.
This only applies to money gifted by parents, not grandparents or other relatives.
3. Opening a Junior ISA (JISA)
Unlike a typical savings account, a Junior ISA (JISA) allows you to save tax-free.
JISAs may be held in cash, stocks and shares, or a mix of both. You can normally transfer between the two account types.
Up to £9,000 can be contributed to a JISA. While the parents or guardians need to open and manage the account, anyone can contribute.
Any interest, dividends or capital gains generated by a JISA are free of tax.
Your child can take over the management of the account at age 16 but cannot withdraw money until age 18.
While a JISA can be a useful component in a family financial plan, it is worth remembering that your child could withdraw and spend all the money on their 18th birthday if they wish to.
4. Opening a Pension for a child
At the other end of the scale, a pension allows you to start saving for your child’s retirement. The current minimum age for accessing pension benefits is 55, but this is increasing to 57 (and potentially higher).
You can contribute up to £2,880 per year on behalf of your child. An additional £720 will be credited in tax relief, resulting in a gross contribution of £3,600. Interest, dividends, and growth within the funds are all free of tax. Tax will apply when your child eventually takes benefits from their pension.
The most powerful aspect of a pension is simply time. If you start a pension when your child is born this could easily make them a millionaire by age 60. This is based on contributions of £3,600 per year and modest investment growth of 5%. Of course, inflation will reduce the real value of the fund, but it’s a great start on your child’s journey towards financial independence.
5. Gifting money to children
If you are aiming to create or maintain your own financial security, it can be difficult to decide how much financial support to offer your children.
A financial plan can help with this, as it looks at your income, outgoings and potential asset values each year for the rest of your life.
A financial plan can guide you in the following ways:
- It helps to establish how much you can afford to gift either as a lump sum or regularly
- It will guide you on the tax benefits and potential drawbacks of each option
- It can recommend different strategies depending on the purpose and timescale of any gifts. For example, JISAs and pensions are both valuable, but serve entirely different purposes
- It will ensure that you have enough to live on and to achieve your own goals
- It may also prompt you to consider sophisticated strategies such as trusts or family investment companies if appropriate.
6. Gifting money to children
Of course, supporting your children should be the first step towards a lifetime of financial independence. There are several ways of encouraging financial responsibility in children, even from a very young age:
- Allow them to earn pocket money for carrying out household tasks or ‘challenges’
- Gamify the experience by linking an app to their savings account. This allows chores to be ticked off with money credited to their savings account
- Be open and honest about the value of money and how much things cost
- Instill good savings habits from an early age. This can be scaled from a few weeks’ pocket money for a new toy, to several years’ savings for a first car
- Encourage enterprise skills and a strong work ethic.
Few things are more rewarding than seeing your child go off into the world and knowing that with the support you have given them, they will be just fine.
We are a firm of Independent Financial Advisers based in London. Please don’t hesitate to contact one of our Chartered Financial Planners if you would like to find out more about transferring wealth to the next generation.
This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation which is subject to change.