If you’re a parent, it’s highly likely that you’ll want to plan to give your child, or children, a good financial grounding.

As a grandparent, it’s equally likely that you’ll want to offer some kind of financial support for your grandchildren.

Financial arrangements of this kind often come up in conversation when I’m talking to my clients. My two initial responses are that it’s clearly an excellent thing to do, and that it’s never too early to start planning.

Clearly the support you give will be dependent on your means, and your attitude to the level of support you want to give your children as they set out on their life journey.

Here are seven practical ways you can help secure your children’s financial future.

1. Teaching key financial lessons to your children

Before we go through some key financial planning steps you can take, I thought it was worth giving you some suggestions of simple financial lessons you should be looking to teach your children.

An understanding of these by the time they get to 18 and are off to university should stand them in good stead:

• The importance of saving money
• Financial scams and the idea of something being “too good to be true”
• How taxation works, and why we pay taxes
• The positive impact of compound interest on savings
• Conversely, the negative impact of interest on debt, particularly credit cards.

Obviously, how and when you want to do these is down to you.

2. Instilling a savings habit with a simple account

When it comes to financial planning for your children, a general savings account in a child’s name is a good, simple starting point.

You’ll have control of this and can both kickstart it yourself with a lump sum, add gifts and then encourage them to save money themselves.

It also helps with one of the five lessons listed above – the importance of saving money.

3. Building them a tax-free sum at age 18 with a Junior ISA

Every child is entitled to have a Junior ISA (JISA) set up on their behalf. When your child reaches 18, the JISA is automatically converted to a standard ISA and control passes to them.

You can choose to invest in cash or stocks and shares – or a mix of both. All proceeds are free of Income and Capital Gains Tax.

If you were to contribute the 2021/22 tax year JISA maximum of £9,000 each year for 18 years, even a relatively conservative annual growth rate of 3% would mean a fund of over £210,000 accruing by age 18.

Obviously, a Stocks and Shares JISA will experience some investment volatility at times. However, up to 18 years is a long investment time frame.

One issue you will want to bear in mind, and plan for, is that your child will have access to a potentially large sum of money at the relatively young age of 18.

4. Making a longer-term investment for them into a pension

The tax incentives on pension savings make setting up such a plan for your child an attractive, long-term savings option.

The maximum annual amount you can personally contribute on a child’s behalf is £2,880 (2021/22 tax year). Even though your child likely won’t be paying tax, the government will still add basic-rate tax relief to your contribution.

Understandably, this must be seen as a very long-term investment! The current minimum pension age is 55 – rising to 57 in 2028.

Money invested in stocks and shares could benefit from substantial growth over such a long period. You are also giving them a valuable head-start when they come to setting up their own pension arrangements.

5. Ensuring they are looked after should the worst happen

If you haven’t already done so, both you and your spouse or partner should set up a will. You’ll also need to ensure you amend it as necessary to reflect any future changes in your circumstances.

Beyond that simple step, you will also want to think in more detail about estate planning and how your assets will be distributed in the event of your death.

It’s a long-term planning process, but it’s never too soon to start having discussions about it with your financial planner.

6. Passing money to children in the form of gifts

As well as contributing to specific financial arrangements, you can also pass money on to your children as straightforward gifts.

In the 2021/22 tax year, everyone has an annual gift allowance of £3,000, which means that sum then sits outside the value of your estate for Inheritance Tax (IHT) purposes. You should note that the £3,000 limit is a total amount, rather than the amount for each individual recipient.

It may be possible to gift more than the annual amount each year without any IHT becoming due if your earned income exceeds your annual spending.

Above the £3,000 limit, you can gift any amount of lump sum and it won’t be included in the value of your estate. The key stipulation is that you need to live for seven years from the date of the gift for this not to be subject to IHT.

This means that if you do want to pass large sums of money or other assets to your children, it’s worth planning this carefully.

You may also want to consider using trusts. These give you the option of specifically instructing how money you leave for your children is to be distributed by your trustees.

7. Seeking financial support from other family members

I’m often asked by grandparents for advice on the best way they can financially support their grandchildren.

If you’re in that position, the level and type of support you give will clearly be dependent on your means.

Some of the options I’ve outlined here are equally valid for grandparents as they are for parents. Be aware, however, that while anyone can contribute to a JISA, only parents and legal guardians can set up a JISA on behalf of a child.

One very practical option is helping with education costs. According to the Independent Schools Council, the average annual cost of private education is now more than £15,000. On top of that, there may be additional  expenses for further education.

Helping with your grandchildren’s education can be a valuable and tangible method of support.

Get in touch

To find out more about financial planning for your children, or grandchildren, please get in touch.

You can email me at graeme@macfp.co.uk or call me on 01349 832849.

Please note

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future results.

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.