Whatever your child wants to do when they’re older, preparing a nest egg for them can be a great help when the time comes for them to spread their wings and fly the nest. As an added bonus, showing your child how to manage the family finances in order to create personal wealth can be a valuable lesson in itself.
Start by making a financial plan
Securing your child’s future is so important that even the busiest people should strongly consider making time to get some high-quality financial advice from a professional financial adviser. There are many steps between birth and young adulthood and a number of decisions for parents to take along the way. In particular parents need to think about the benefits of spending money during their child’s younger years as opposed to investing it for their later ones.
Remember that time can turn pennies into pounds
Even if you can only put aside small amounts each month, it’s still worth doing so. Time will help those pennies grow into pounds. With this in mind, the earlier you start saving for your child, the longer time will have to work its magic. If, however, your child is already well on their way to growing up, then it’s still worth putting aside whatever you can for their future needs. Put quite simply, whatever savings and investments you can build for them, it’s going to be better than nothing.
Invest as much as you can afford
Roughly speaking most children will follow a similar path from birth to the end of compulsory education. During this period the key financial question is often whether a child will attend a private school or a state school. In either case the time the need to complete their core education is essentially the same. After core education is finished young people can choose to follow different paths depending on their interests and talents. These paths can broadly be defined as further education, professional training, employment or a gap year. Each of these paths has different financial implications. It’s worth considering, therefore, having as much money as possible available for them. Even if it is not needed, it may make a significant difference to their start in adult life. For example young people who find jobs may be able to get to them by public transport, but having their own transport can make life much easier.
Aim to invest regularly
Even when money is tight, try to look on investing for your child’s future as an integral part of managing the family finances. This may mean taking the decision to tighten other areas of spending in order to be able to plan ahead. Of course, it’s fine to top it up with extra funds from time to time. For example, family and friends could be encouraged to make donations at Christmas and birthdays instead of spending their full budget on presents. These should, however, ideally be extra funds rather than the bulk of them. Having said that, as always, even if you can only afford to set money aside from time to time, it’s still better than nothing.
Look out for the tax man
Children get the same personal income tax allowance as all people born after 5th April 1948. Under certain circumstances children can receive income from children’s savings accounts (which are different to Junior ISAs) without paying any tax on the interest. For this to happen, their parents need to fill in an R85 form. Junior ISAs, meanwhile, work in much the same way as their adult counterparts. It should however be noted that as soon as the child reaches 18, the full ISA will immediately become their legal property to use as they wish. Parents with concerns about how their child will react when suddenly handed a large sum of money may need to look for other ways to prepare for their future. This may be a good time to get some unbiased financial advice from a professional financial adviser.
Tax bands http://www.hmrc.gov.uk/rates/it.htm
Tax on saving’s interest http://www.hmrc.gov.uk/taxon/bank.htm
Rules on interest on children’s savings from funds given by parents http://www.hmrc.gov.uk/manuals/saimmanual/saim2430.htm
ISAs/Junior ISAS http://www.hmrc.gov.uk/taxon/savings.htm