Financial planning for your children

When considering your children’s future prosperity it has become increasingly important to plan ahead. The cost of living has risen in recent years, along with the costs of property ownership and university education, so early parental financial support could prove vital for your children’s adult life.

Putting aside money for your children can also be a good way to pass on wealth while saving on inheritance tax, if done appropriately. You might want to put money aside through allocating a portion of your income each month or occasionally gifting large sums, depending on your financial circumstances.

Junior ISAs

There are several key options to consider when making financial plans for your children. The first I’ll look at is Junior ISAs (JISAs), which are designed to help families save for their children’s future.

JISAs allow you to hold investments in a child’s name tax-efficiently. Only parents can open one on behalf of a child, but anyone can pay into it, and up to £9,000 can be paid into a JISA per child each tax year.

It’s important to note that a JISA automatically converts into an adult ISA in the child’s name when they turn 18. At this point control of any investments and savings is handed over to the child.

At Schroders Personal Wealth we believe long-term savings for children should be held in an appropriate diversified portfolio of investments. Diversified portfolios have been shown to beat both cash and inflation in the long term, although this isn’t guaranteed. A JISA can be a tax-efficient vehicle for holding diversified portfolios for children.

Personal pensions

You could also set up a personal pension in your child’s name, to save for their retirement. A maximum of £2,880 a year can currently be paid into a child’s personal pension.

A key advantage of this approach is the government will automatically add back 20 percent tax relief to the pension, amounting to a maximum of £720 a year. This brings the total maximum annual child’s pension investment to £3,600.

A drawback is these funds can’t be accessed until your child becomes old enough to draw on their pension. At present this is generally at the age of 55, but it will rise to 57 from 2028.

Discretionary trusts

Children can also be made beneficiaries of a discretionary trust. These are trusts where the trustees can make certain decisions about how to use the trust income, and sometimes the capital. An advantage with discretionary trusts is the trustees responsible for distributing its funds have some flexibility in how they do so. This discretion is laid out in the terms of the trust.

Consider, for example, a situation where grandparents want to create a discretionary trust for all their grandchildren. If some of these grandchildren are born after the creation of the trust, or perhaps after the death of the grandparents, then the trustees could ensure all of the grandchildren benefit from the trust.

Explaining plans to children

In my view real benefits can be gained from involving your children in some aspects of your financial planning. It can help them learn about personal finance and help build a foundation of knowledge for their future. And the more your children grasp the basic concepts of budgeting, saving and investing, the better equipped they’ll be to make the most of any money you set aside for them.

Children can be engaged in conversations about financial plans even from a young age. In their early years, many children are beginning to understand the concept of money and tend to be curious about the world, making them keen to learn.

Once your child has a good grasp of their finances or has reached the age to access their funds, you could consider introducing them to a financial adviser. Here at Schroders Personal Wealth, our advisers can only talk to children under the age of 18 alongside their parents. As soon as they reach 18, we can meet them on a one-to-one basis to discuss their finances. I firmly believe that children who receive good financial advice from a young age can acquire valuable financial habits that can support them for the rest of their lives.

Here at SPW we begin with a free, no obligation conversation. There are no hidden fees or charges, and clients only pay if they choose to go ahead with the recommendations in their personalised financial plan.