A recent study by the Resolution Foundation has shown that Millennials in the UK are generally worse off financially, and have a lower standard of living than previous generations. Given the cost-of-living crisis and increasing wealth gap, Generation Z may not fare much better.
Helping children with important milestones or getting on the property ladder is a common goal in financial planning. Not only does this allow parents to provide financial assistance when it is most needed, but it can also help to reduce Inheritance Tax (IHT).
Starting early can allow you to help your child aim for the best financial start in life and guide them to build good habits around money. In this guide, we look at some of the things you can do to boost your child’s financial future.
Teach Them About Money
It’s never too early to start learning about money. Some of the strategies you can use include:
- Discussing the value of money and how much things cost. Children can learn from an early age that money is not an infinite resource and sometimes you need to prioritise.
- Reward children with pocket money for helping with household tasks.
- Encourage your child to save for a much-wanted toy or accessory rather than spend money on impulse.
- When your child is old enough, set up a bank account with a debit card. This will allow them to control and monitor their own spending.
- Discuss the basics of budgeting, saving, and investing, building on this knowledge as they get older.
- Remember that children learn a lot of their behaviour from their parents. If you struggle with overspending or are overly strict with money, they could pick up the same habits or go to extremes in the other direction.
Being open about money and modelling good financial habits can help to set your child up for success once they are managing their own finances.
Set Up a Junior ISA
It is never too early to start saving for your child. A Junior ISA is a simple and tax-efficient option which allows you to build up cash savings or investments for your child when they reach 18.
You can contribute up to £9,000 per year to a Junior ISA and all returns are tax-free. When your child reaches age 18, they can either withdraw the money or roll it over into an adult ISA.
A Junior ISA is the ideal option to provide a lump sum which can help with education costs, a car, or a deposit on a first home.
However, if you want the money to be accessible before age 18, you will need to look at other types of account. Similarly, some parents feel that 18 is too young to be given a large sum of money and prefer to retain some control.
Junior ISAs replaced Child Trust Funds for children who were born after 02 January 2011. If you still have a Child Trust Fund, you can continue contributing or transfer it to a Junior ISA. Junior ISAs are more widely available and tend to have a greater choice of investments.
Contribute to a Pension
Many people set up a pension for the first time when they start work. But you can actually set up a pension for your child from birth.
You can contribute up to £2,880 per year into a pension for your child. With tax relief, this is grossed up to £3,600 per year.
By the time your child is 18, they could already have a pension pot worth potentially over £150,000 (this is based off Vanguards average return for a 60/40 balanced portfolio of 8.7% per annum). By the time they reach retirement age, assuming the same level of contribution is maintained, they could easily have over £1 million.
There are several advantages to contributing to a pension for your child:
- Contributions benefit from tax relief and growth within the funds is free of tax.
- They can continue to manage and top up the pension when they are old enough.
- As your child cannot access the money until their minimum retirement age, there will be no temptation to withdraw and spend the money early.
- Compound growth can boost returns over the long-term.
Of course, there are some potential downsides:
- Your child won’t be able to access the money until at least age 58.
- Under current rules, the first 25% drawn from a pension is tax-free, but the remainder is taxable.(Up to the LTA currently or proposed LSA)
- Pension rules change frequently and may be substantially different by the time your child retires.
You can, of course, make gifts to your child at any point. Certain gifts are immediately outside your estate and are not subject to IHT.
Larger gifts remain in your estate for seven years.
If you want to make a larger gift but do not want to give up full control, you may want to consider a trust. A discretionary trust allows you to nominate trustees to make key decisions, including who can benefit from the trust (within a particular class of beneficiaries, e.g. your children and grandchildren), and when. This can help to protect the assets from financial mismanagement, bankruptcy, or divorce.
Trusts are a complex area and it’s important to get it right from a legal and tax perspective. It’s worth seeking advice when setting up a trust as you may not be able to make changes later.
Please don’t hesitate to contact a member of the team if you would like to discuss options for giving your child the best financial start in life.
The content in this article was correct on 16/01/2024.
You should not rely on this article to make important financial decisions. Teachers Financial Planning offers advice on savings, pensions, investments, mortgages, protection equity release and estate planning for teachers and non-teachers.
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