As all parents will tell you, making sure your children are well-protected and safe is the number one priority. For many this extends to their financials, providing your children with a healthy steppingstone to make the transition into adulthood all the more comfortable and secure.
According to ThisIsMoney, ‘the amount of money held in non-interest paying bank accounts, including current accounts, increased by £52.3billion between April 2020 and the same month this year, to £242billion. Some 34% of parents have saved for their children in often low interest paying bank accounts over the last 12 months, while 37% have used a standard savings account.’
Making sure you financially plan correctly for your children is so important, especially as house prices and overall economic inflation continues to increase. We spoke with one of our financial partners, Elliott Winner of KWM Wealth Ltd., on the impact of planning for your children’s future, what options are out there and why setting up a plan as early as possible will reap the most rewards.
In your eyes, just how important is it to plan financially for your children?
With the cost of key milestones such as university education and first-time deposits on property becoming ever more extortionate as inflation rises, it is more important than ever before to plan early for children’s futures.
The earlier these foundations are laid, the less hard work is normally required, because of the positive effects of compound interest. The ‘we’ll worry about that closer to the time’ approach only creates financial pressure on families, which can be avoided through small and consistent behaviours from early on. Obviously, it is a lot harder for some families than others to set aside the money but incorporating a plan that works for your own circumstances can always be achieved.
How can a family, no matter what their income is, orchestrate a financial plan that will see their children financially healthy once they become adults?
The first step would be to speak with a financial adviser who can help with a budgeting system, whereby they can work out how much money they can financially allocate to these plans on a monthly/annual basis. Projections can then be run to illustrate how the funds could look by the time the children become adults. This can be so rewarding to see as those ambitions for your children can be put into prospective figures.
My opinion is no matter big or small, a helping hand when entering the adult world can only be a good thing.
Do you advise on setting up separate individual plans for each child or can this be consolidated?
I would recommend keeping plans separate, and that way it retains the child’s own allowances for the various types of accounts out there. Once they become adults, it will give them sole control of their finances, instead of the responsibility being shared which could lead to conflict or awkward situations.
What types of accounts are out there for children’s savings which allow for higher interest rates/tax-free?
There are a range of children’s bank accounts across fixed-rate and easy-access, and the money is held in cash. I have seen some of these accounts earn up to 4%, and are accessible, but in my opinion, this is not necessarily such a good thing. In my experience, I have seen scenarios where parents have needed access to money for whatever reason, and it is ultimately the children’s accounts that get dipped into. It is not always that simple just to replace these funds, and the plans for the children’s futures then take a hit.
The other downside to holding funds in cash over the long term i.e., until the child is likely to use the money at 18 for something meaningful (first car, travelling, university etc.), is that inflation will have likely eroded a big chunk of these funds. This is the biggest danger to the money in my opinion.
Investing has the potential to beat inflation, especially when the time horizons are likely going to be 10 years plus. The money is held in a number of stocks and shares or investment funds, and then going one step further to keep any the growth tax efficient, it can be wrapped in a Junior ISA (Individual Savings Account). The most that can be saved into a Junior ISA is £9,000 per child per tax year. These funds cannot be accessed until the child turns 18, however, my above point highlights why this is a benefit.
The point to be mindful of is that at 18 years old, the money is legally the children’s. This is why education is important from as early as possible, so when the child is old enough to access their savings, the whole fund isn’t blown on a trip to Magaluf.
Believe it or not, children can have a pension. My daughter is currently 18 months old and has one. This is of course, ultra-long financial planning, because the minimum age that an individual can access a pension in the UK will be 57 from 2028. However, there is something incredibly powerful about compound interest over this many years. Purely for example purposes, the below calculation illustrates this well:
- £100 per month from birth to 18 years of age (total contributions = less than £22,000)
- No further contributions after age 18
- 8% per annum growth rate
- By age 60 the pension will be close to £1.5m
The most that can be contributed into a child’s pension per tax year is £2,880, however, one of the benefits is that the Government will top up these contributions by 20% so that the maximum contribution turns into £3,600.
As a new parent, when do you think is the most appropriate time to start educating your children on how to take care of their finances?
I would say as early as possible, which is the concept of the Children’s book ‘Save Your Acorns’. In the book, it explains how acorns can be saved, and then they grow into trees, and these trees give you more and more acorns in the future.
If concepts around budgeting, saving, and spending are brought in early on, these real-world skills will propel those children forward incredibly.
What other ways can parents provide a financially secure future for their children?
If you look at the overall role of a financial adviser, it is to ensure that the people have enough money in their lifetimes to have the lives they want. Whatever is left over, goes to the people they want it to go to.
This means that if the parents are set up correctly themselves, then they are planning for that long term succession plan, which will ultimately benefit their children and even grandchildren in the future. As mentioned above though, taking advice in this area is key because it encompasses all facets of financial planning from investments to protection, to tax and estate planning.
We hope this has outlined to you the options in planning for your children’s financial future is and how to appropriately do so. If you require any more information on financial planning or our financial advisory services, please do not hesitate to get in contact with us at Nordens where one of our trusted advisors would be happy talking you through your query.