5 simple financial planning steps that can help your children for the future

Category: News & United Kingdom

Planning your finances so that you can achieve your goals for the future is an extremely valuable thing to do.

Alongside these plans, you may also want to consider ways in which you can support your children in their financial futures.

From saving and investing to giving them a crash course in other important financial matters, here are five simple but effective financial planning steps you can take that can help your children for the future.

1. Open a savings account in their name

Perhaps the first and most obvious step you can take is opening a savings account in their name. Simply saving money in an account that they’ll be able to access at adulthood can be a great way to provide a lump sum for their future.

Imagine that you put away just £100 every month for your child – that’s £1,200 a year – with an annual interest rate of 1.4%, the highest rate available on an easy access account, according to Moneyfacts as of 7 July 2022.

If you did this every month until they turned 18 then, assuming the rate of interest stayed the same, they would have a nest egg of just under £24,558.

Additionally, a savings account can present a great opportunity to teach them the very basics of what it means to manage their finances.

Of course, one important thing to remember is that the rate of inflation is currently historically high in the UK in July 2022.

Indeed, the Office for National Statistics (ONS) registered an increase of 9.4% in the 12 months to June 2022, when data was last available.

So, it’s important not to hold too much cash for your child so that it doesn’t lose spending power against rising prices over these 18 years.

Again, this makes a valuable teaching opportunity for a teenage or adult child, explaining the eroding effect that inflation can have on their wealth and encouraging them to think beyond just saving.

2. Open a Cash or Stocks and Shares Junior ISA

Rather than opening a savings account, you could instead open a Junior ISA (JISA) for your child.

As you may well know, ISAs allow you to save or invest your money with any interest or investment returns it generates being free from Income Tax, Capital Gains Tax (CGT), and Dividend Tax.

JISAs work in the same way, allowing you to save in a Cash JISA or invest in a Stocks and Shares JISA. Each child you have has a separate JISA allowance, which is £9,000 in the 2022/23 tax year, and you can divide that allowance across both a Cash and Stocks and Shares JISA if you wanted to.

JISAs could present an opportunity to grow wealth for your child more tax-efficiently than in a savings account.

Meanwhile, if you open a Stocks and Shares JISA, you also have the chance to generate a greater return through careful investments in the stock market than interest on cash can typically provide.

It could also be a good way to teach your child about investing. Your child can start making decisions with the account when they turn 16, giving you the chance to show them how to invest prudently to increase their wealth.

One thing to be aware of here is a JISA will automatically pass to your child on their 18th birthday. So, it’s important that you’ve given them a firm grounding in sensible, long-term thinking with their money, as otherwise they might look to blow their entire nest egg when they reach adulthood!

3. Start a pension for them

If you wanted to take a longer-term outlook, you could start a pension, such as a junior self-invested personal pension (SIPP).

Like a JISA, investments in a junior SIPP are also protected from Income Tax and CGT. But crucially, they also benefit from tax relief on contributions, meaning each £100 contribution technically only “costs” you £80.

You can make annual contributions to a junior SIPP of up to £3,600, including tax relief – that means you only need to contribute £2,880 each year to maximise this.

This example from consumer finance website, Unbiased, demonstrates how a junior SIPP can be useful.

Imagine you make the maximum contribution – £2,880 from you topped up to £3,600 with tax relief – each year to a junior SIPP from the day your child is born until they turn 18.

Assuming you make no further contributions, and the fund achieves annual growth of 4%, that means your child could have a pot worth more than £620,000 by the time they turn 65.

As you can see, a junior SIPP can potentially be a tax-efficient way to support your child’s future, while also showing them the immense value of tax relief on pension contributions and the power of compounding returns.

In turn, this may encourage them to make the most of any other pensions they have throughout the course of their life, too

Of course, your child won’t be able to access this money until later life. So, be sure they don’t need it to support themselves in the meantime if you decide to go down this route.

4. Make sure you have a will in place

Having a comprehensive will and estate plan is one of the most important choices you can make to support your children financially.

If you don’t make plans for a time when you’re no longer around, your wealth and assets may be subject to Inheritance Tax (IHT), charged at 40% as standard. This will depend on a range of factors including whether you are domiciled in the UK.

You do have an IHT nil-rate band (£325,000 in 2022/23) and potentially a residence nil-rate band (£175,000 in 2022/23) if your direct descendants inherit your home from you.

Additionally, your nil-rate bands can be combined with your spouse or civil partner, meaning you may be able to pass on up to £1 million without incurring a tax charge.

But any value above these amounts may be subject to IHT, severely reducing how much of your wealth your children end up receiving from you. And, if you are UK domiciled when you die, your worldwide estate is subject to IHT.

Planning for your death may feel like something you’re doing for yourself. But actually, estate planning like this is almost entirely about your loved ones instead. Ensure you have a plan for your money so that your children are the biggest beneficiaries of your wealth.

5. Teach them some simple financial lessons

Perhaps above all else, help your children by imparting your years of financial experience and wisdom to them.

Opening a savings account, JISA, or pension and teaching them the value of saving, budgeting, investing, and the immense value of compounding returns are all incredibly valuable lessons to learn.

But there are other key lessons you may want to impress on your children.

For example, you might want to teach them the value of avoiding expensive debt, or how if an investment opportunity sounds “too good to be true”, it means it probably is.

When they’re old enough, you may even want to bring your children to your financial planning meetings, demonstrating the immense value that working with a professional can provide.

You’ve been there, done it all, and probably made some mistakes along the way with your money. Help your children’s experience to be even better than yours by showing them what you did right, and how they can improve even further.

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Please note

A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.

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.

This article is for information only. Please do not solely rely on anything you have read in this article and ensure that you conduct your own research to ensure any actions you may take are suitable for your circumstance.

All contents are based on our understanding of HMRC legislation, which is subject to change.