Starting a family is a significant and exciting lifestyle change and is likely to affect how you use your income and plan for your future.
It’s no longer just you, or even you and your partner that you need to think about.
In a previous article I looked at important financial lessons you should teach your children as they are growing up. In this article you can read about how you should look to include your children in your financial plan.
It’s not just about opening a savings account for the kids (although that is part of it), it’s about incorporating them into every aspect of the plan.
Here are three ways you could do that.
1. Start saving for your child
The first and perhaps most obvious step to ensuring financial stability for your children other than teaching them about money is to open a savings account for them.
While there are plenty of easy access savings accounts designed to help children start saving, there are two types of accounts that might be much more useful in the long term.
Junior ISA
You can open a Junior ISA (JISA) and manage it on behalf of your child until they reach 18. At that time, ownership of the account passes directly to them.
In 2022/23, the annual subscription limit for a JISA is £9,000 and this can be split between cash and stocks and shares. One key criterion to bear in mind is that your child must be a UK resident to be eligible.
The biggest benefit of a JISA over an easy-access savings account is that neither you nor the child will have to pay Income Tax or Capital Gains tax on any returns. If you are paying into a child’s JISA consistently across 18 years, this can create a significant nest egg.
Junior pension
Even though it feels like a lifetime away, starting a pension to save for your child’s retirement is one of the most effective ways to ensure financial stability for them later in life.
You can typically pay up to £3,600 gross into a pension for your child each year.
Thanks to the tax relief, for every £80 you contribute to the pension, £100 is deposited. So, you need only invest £2,880 for the maximum of £3,600 to be paid into your child’s pension. If your child earns more than £3,600, you may be able to contribute more.
The real magic of saving into a pension comes from the power of compounding.
According to an example by Unbiased, investing £3,600 gross each year into a pension until the child turns 18, assuming annual returns of 4%, could amount to a pension pot of over £620,000 by the time the child turns 65, even if no further contributions are made after the child’s 18th birthday.
So, while it may not seem like something to think about so early in life, the sooner you can help your child start to save for retirement, the more robust their finances will be when the time does come for them to finish working.
It’s important to remember that from April 2028, the minimum age for accessing a pension will be 57 years of age. That number is likely to increase in the future. So, while investing into a pension will be beneficial to your child for their retirement years, they won’t be able to use the investment before then to pay for university tuition or to get onto the property ladder, for example.
2. Funding their education
You may recall that we looked at some of the important issues to consider if you’re considering funding your children’s education in a previous article.
According to the Independent School Council, if you would like your child to receive a private education up to the age of 18, the total cost could be almost £200,000.
On top of that, tuition fees at English universities typically costs £9,250 a year, with the added subsistence costs of moving away from home on top of that to be taken into account.
This is where a strategic savings plan that caters for both long- and short-term savings goals is crucial. Where those goals are more than 10 years away, investing in a portfolio with the appropriate risk profile may generate more significant returns than cash savings. This is because the buying power of cash savings can decrease over time due to inflation.
As always, we would strongly recommend you get expert advice to ensure you maximise your returns and can support your family in achieving their goals.
3. Estate and inheritance planning
Financial planning that involves your children doesn’t end when they become adults. In fact, your later-life financial plan is just as important to your children’s financial wellbeing.
Write, and regularly review, your will
Having a will is the only way you can be sure that your wealth and assets will be distributed according to your wishes after you pass away. It also helps to speed up the processing of those assets for your children during a very difficult and emotional time of grief.
As well as making sure your assets are passed on to the right people, as a parent you can also specify who will be the legal guardian for your children should you pass away before they turn 18. Even though it’s something none of us wants to think about, taking the time to ensure your wishes are legally set out will save a lot of distress should the worst happen.
Remember that your wishes and circumstances may change over time, so review your will regularly, and always after major life events such as getting married, divorced, or having another child.
When it comes to drawing up your will, you should find the guest article written by Sarah Ip of Noble Wills helpful.
Consider gifting money to your adult children
As well as leaving an inheritance to your children in your will, you may also want to consider gifting assets to them while you’re still alive.
Not only does this allow you to see the good that your gift has done for your family, but it also means you are able to financially support your children when they need help rather than at an unspecified time in the future.
Gifting can also have the added benefit of potentially reducing the amount Inheritance Tax (IHT) they have to pay after you die. However, it is important to assess how much money you are likely to need in later life so that you are able to pay for any care you may require, for example.
Just like making a will, thinking about the possibility of requiring care as you grow older can be difficult. However, no matter how well we take care of ourselves, the truth is that most of us will require help with everyday tasks as we grow older.
By making a plan now with your financial planner, you can feel confident that you’ll be able to pay for the care you need even if you decide to gift a lump sum to your children before then.
You may wish to set up a trust
A trust is a legal arrangement in which you nominate a trustee or trustees to take responsibility of assets you give them on behalf of someone else: the beneficiary(ies). There are several reasons why you might set up a trust.
- The assets in the trust no longer belong to you, meaning their value may not be included in your estate when calculating the IHT owed on your estate after you die.
- You can decide when and how your children will receive the assets from the trust, for example what age they need to be or what the assets can be used for.
- Some types of trust allow your partner or spouse to receive income from the trust without having access to the assets within it. Those assets will then pass to your children. This could be helpful if you have remarried and have children from a previous relationship.
Trusts allow you to set aside savings, investments, or even property for your children to inherit at a time that you specify. So, they could play a role in your family’s financial plan.
An article we published in 2021 about some common trusts used in IHT planning may be of interest to you.
Get in touch
If you’d like some help with creating a financial plan that supports your whole family throughout each stage of life, please contact us by email or, if you prefer to speak to us, you can reach us in the UK on +44 (0) 208 0044900 or in Hong Kong on +852 39039004.
Please note
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future results.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts.
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.
The Financial Conduct Authority does not regulate estate planning, tax planning or will writing.
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