Published: July 2023
It’s a subject that can mean different things to different people. According to the Mortgage Advice Bureau, the Bank of Mum and Dad contributes 26% of funds to the UK housing market, making it the ninth biggest lender in the market.
84% of parents now help their children to get on the property ladder. However, it’s more than just helping them get on the housing ladder.
From a personal perspective, I have a 20 year old son who is looking to do just that and a 17 year old daughter currently contemplating which university to attend, and all the costs that can come with it.
What are some of the areas of financial planning to consider if you have children?
Saving for the future
One of the obvious areas to look at are ISAs which are tax advantaged investments giving returns free of income and capital gains tax. Lifetime ISAs (LISA) are aimed at those looking to buy their first home, but can also be used for later life savings. They have a smaller annual allowance – £4,000 for the 2023/24 tax year, compared to £20,000 for an ISA – but qualify for a 25% government bonus. (Source: HMRC)
However, there are restrictions for LISAs, such as an upper limit of £450,000 for the cost of the property. Also, if you withdraw money before you are 60 and it’s not used for a property purchase, there is a 25% withdrawal charge. You need to buy the property at least 12 months after making the first payment into the Lifetime ISA, so a bit of planning is required. You must be 18 or over, but under 40 to open one – that’s me out then!
An ISA provides a great opportunity to save using the £20,000 annual allowance without the restrictions of a LISA, but not the government bonus. If, as a parent or grandparent, you are choosing the wise idea of planning ahead, you could use some of your annual gift allowances to help your child/grandchild save. It doesn’t have to be just for a property purchase or funding university. But don’t forget, they will gain access to the ISA at 18 and it is up to them how they spend the money.
If you are really looking at forward planning, there are always pension contributions which attract tax relief but can’t be accessed until at least 55 (increasing to 57). Even if your children have no relevant income, a net contribution of £2,880 can be made (£3,600 after tax relief).
If your child/grandchild is under 18, then a Junior ISA may be a consideration. Again, a more restricted allowance at £9,000 p.a., and they can take control of the account at 16, but cannot withdraw funds until 18. We will often have the conversation about the pros and cons of them accessing such a fund at 18.
So, what about investing and retaining an element of control? An investment account that you control, but can be designated for a specific purpose, such as your children’s property purchase, or university funding. It’s another option. We can work with your Solicitor to help you arrange Trust based investments if the idea of accessibility at 18 is not for you.
If you are truly considering a long term investment for the children, then what about pensions? If accessibility is an issue, contributing to a pension that can’t be accessed until your child is 55 (rising to 57) is one way to combat that, but is that restricting access a step too far?
As with any area of Financial Planning, it’s about establishing what your objectives are and working through how to achieve them.
A greener future
You may perceive investing for a better future in a different way. Is it about what you invest in, as much as how you invest? Can you ‘do good’ through investing? We manage ethical portfolios alongside our unconstrained investment strategies that will consider ESG (Environmental, Social and Governance), sustainability and thematic investing. When managing these portfolios we will think about how to ‘do good’ as much as how ‘not to do bad’ when it comes to investing ethically.
Protecting the future
It’s all very well planning to save for their future, but what if that isn’t even possible? Providing for your children’s future may not involve investing at all but protecting your life or your income. It’s an outcome no one wants to consider, but putting life cover in place could take some of the money worries away from your loved ones should you die prematurely.
Income protection could help replace lost income if you are unable to work due to illness. Could you afford to support your children through university if repaying the mortgage becomes difficult? According to Cancer Research UK one in two people in the UK born after 1960 will be diagnosed with some form of cancer during their lifetime. With these statistics lurking in the background, critical illness cover will be more expensive than an equivalent level of life cover but, as well as providing for you, it can help provide for your children.
Again, there are plenty of options to consider; why not let us help guide you through the challenges of deciding which options will help you protect your family’s future.
If you require financial planning advice, please speak to a member of our financial planning team on 01223 233331 or email info@mmwealth.co.uk.
Disclaimer
Opinions constitute our judgment as of this date and are subject to change without warning. The value of investments, and the income from them, can go down as well as up, and you may not recover the amount of your original investment.
The information in this article is not intended as an offer or solicitation to buy or sell securities or any other investment, nor does it constitute a personal recommendation.
The information contained within this blog is based on our understanding of legislation, whether proposed or in force, and market practice at the time of writing. Levels, bases and reliefs from taxation may be subject to change.
The Financial Conduct Authority do not regulate tax planning.
