The economy has been spluttering along in a decidedly lack lustre way since the Global Financial Crisis of 2008. In many ways, things have been toughest for young people just starting out in the professional world.
In recent years, a number of factors – the pandemic, endless geopolitical volatility and outright conflict – have combined to make the economic landscape even more challenging. Growth has been sluggish, the relationship between inflation and wage growth has been inconsistent for a while now, and as for property prices… well, their increase has been utterly decorrelated from earnings growth for decades now.
As an ambitious professional, you want what is best for your money. And as a parent, you want what is best for your children and family. That does not mean that you want them to have exquisite clothes or the latest iPhone. But it does mean that you want financial security for them, and you want them to have as much of that security as possible early on in life. That way they can build on it and then pass it on to their own children.
There are a number of strategies and tools that you might consider at various junctures of your child’s life.
Actually, you can start planning for your child’s financial future the moment they are born.
Obviously your child’s education is a key consideration. If you want them to go to a fee-paying school, then starting to pay into an ISA is probably the most effective way of funding it – particularly since you will be able to leverage investment income outside of the taxable environment. You can withdraw money tax-free – which will be a significant advantage given a future Labour government could add VAT to public school fees.
Another way to provide for your child’s short-term future is to pay into a Junior ISA. You can put in up to £9000 each year, and again this money will enjoy tax-free growth. This could be used to help with university fees or student rent, but remember, your child will be legally entitled to access it as soon as they turn 18.
Other than their career, young people leaving higher education are, for the most part, focussed on two objectives: paying off their student debt and getting onto the property ladder.
The advantage of helping your child to pay off their student debt – which can be upwards of £50,000 – is that the amount of interest accrued is kept to a minimum.
However, given the fact that getting onto the property ladder is now harder than it ever has been, helping by putting money towards a deposit (through a separate ISA, for example) will be welcomed by many.
Incredibly, in 2023 318,000 properties were purchased with parental support and over half of all under-35s recently bought a home with assistance from the Bank of Mum & Dad.
It’s worth pointing out that you can give your children money fairly easily. As your dependents, there is no legislation preventing you from doing so. But for entirely understandable and legitimate reasons, you might not have complete confidence in your child to make sensible use of that money – even once they have turned eighteen.
In such circumstances, setting up a discretionary trust might be a good move.
There are, needless to say, some costs involved, but once the trust is set up, you can filter money down to your children as and when they need it. This kind of arrangement offers considerable flexibility: they can receive cash, a property can be purchased within the trust and income can even be generated. Once you believe that your child has a more responsible attitude to money, you can close down the trust.
Another option is to invest into a pension for your child. Anyone not earning money can contribute £2880 (or £3600 gross) into a pension. It has to be set up by their parents, but anyone (grandparents, other family friends and relatives) can contribute to it.
Needless to say, they will not be able to access it at 18: the age at which a private pension can be accessed is currently 55 (increasing to 57 in 2028).
To illustrate the benefits of doing this, if you were to pay this amount in every year until your child is 18, the pot would be worth over £700,000 when they come to access it at age 57 (assuming net growth of 5% a year, from a total cost to you of £51,840).
The best way to secure your child’s financial future is to set a good example and embody the financial behaviours that you would like your children to adopt. If you want your children to get into good spending and saving habits, it is important for them to see you making sensible spending and saving decisions.
Practise what you preach and do so with consistency. Teaching your children to be financially literate can take time, but if you communicate consistently and continuously, they will pick up good habits that will serve them well in the long term.
You could even consider bringing them along with you next time you check in with us at Investment Quorum.
